Topline: Mortgage trade groups urge VA to revise partial-claim rules as veteran borrowers face new guidelines
WASHINGTON — As the Department of Veterans Affairs moves toward implementing the VA Home Loan Program Reform Act, the nation’s leading mortgage trade groups have urged policy revisions. In a formal letter submitted this week, the Mortgage Bankers Association (MBA) and allied groups say the proposed partial-claim and loss-mitigation framework could leave veteran borrowers with fewer options than peers with Fannie Mae, Freddie Mac, or FHA-backed loans.
The groups argue that while the VA aims to strengthen protections for veterans, the current draft creates a costly and complex path to home retention. They are pushing for a streamlined approach that preserves veteran eligibility while reducing costs for lenders and the loan guaranty program. The phrase often echoed by industry observers this week is that the VA’s proposed design “could put veterans at a disadvantage” relative to other loan programs in a tough housing market.
The groups emphasized that the emphasis should be on practical outcomes: lower recidivism, fewer defaults, and clearer paths back to sustainable payments for delinquent borrowers. In their view, the ultimate goal is to protect veteran homeownership without imposing unnecessary friction on lenders or borrowers alike.
What the VA proposed for partial claims and loss mitigation
Under the draft rules, distressed veterans with VA-guaranteed loans would gain access to a partial-claim option after meeting several eligibility tests. The core elements highlighted by the groups include:
- Delinquency threshold: Eligible borrowers would need to be at least three months delinquent.
- Servicer requirements: The borrower’s servicer must submit a partial-claim trial payment for VA review before qualification.
- Payment history: Borrowers must have made at least 12 payments since loan origination and at least six since any modification.
- Retroactive effective date: The option would apply retroactively to May 1, 2025, aligning with the end of the VA Servicing Purchase (VASP) program.
- Loss-mitigation waterfall position: The partial claim would appear as the seventh step in the VA’s loss-mitigation waterfall, with a 40-year loan modification remaining the final option for home retention.
- Interest on partial claim: Servicers would not be allowed to accrue interest on the partial-claim balance.
Critically, the draft envisions a long runway to any final resolution, with a 40-year modification remaining as a backstop. The overall structure has drawn scrutiny from lenders who say the combination of requirements could create confusion and limit options at pivotal moments in a borrower’s recovery.
In a letter addressed to Patrick Zondervan, executive director of the VA’s Loan Guaranty Service, MBA officials urged the department to rethink the sequence and the cost calculus that accompanies a partial claim. The comments reflect a broader concern across the industry that the current framework may not align with market practices or the realities facing veterans in today’s housing market.
“The partial-claim option, as drafted, risks creating a misalignment with what similar programs offer,” one MBA policy advisor wrote. “Our members want a straightforward path that prioritizes sustainable payments and reduces the total amount of time a borrower spends in hardship.”
Why the groups want changes—and how they would work
At the heart of the MBA’s case is the belief that the loss-mitigation waterfall should reward borrowers who stabilize their finances without repeatedly boosting monthly payments. The groups argue that it would be preferable to place any modifications that raise monthly payments later in the sequence, and to replace the proposed “special forbearance” with a standard forbearance program that can pause payments for one to three months without triggering additional costs.
The broader aim is to harmonize VA policies with those of Fannie Mae, Freddie Mac, and the FHA, reducing the gap in options available to veterans and other homeowners. The MBA notes that veteran borrowers should have access to the same, or better, risk-sharing tools that lenders depend on in other programs, while keeping the guaranty fund’s costs in check.
In addition to suggesting structural changes, the groups highlighted several design elements that could be improved, including:
- A clearer path to re-establish regular payments after a forbearance period, with predictable outcomes for borrowers.
- A streamlined set of criteria for eligibility to avoid inconsistent interpretations by servicers.
- Better alignment with servicer workflows to minimize delays in applying mitigation measures.
“We are not asking for fewer protections,” the MBA letter states. “We are asking for smarter ones that help veterans stay in their homes while controlling costs for the guarantor and the lender.”
Market context and policy implications
The VA loan program remains a cornerstone of veteran homeownership, though its share of new originations has fluctuated with rate cycles and housing demand. With mortgage rates fluctuating in the current cycle, policymakers and industry players are watching closely how loss-mitigation tools perform when delinquencies rise. The proposed partial-claim option is designed to give lenders a backstop while providing a path back to full ownership for veterans who fall behind on payments.
Industry insiders say that any shift in the waterfall could affect the cost of the loan-guaranty program and the pricing of VA-backed loans. If the partial-claim option is perceived as too difficult to use or too costly for lenders, the program could face slower adoption or higher overall costs for the guaranty fund. The MBA’s call for simplification aims to reduce administrative friction and improve outcomes for borrowers and lenders alike.
From a financial markets perspective, stability in veteran housing policy is one of several factors investors monitor during a period of moderate rate volatility. Banks and lenders rely on predictable, well-defined loss-mitigation tools to manage credit risk on government-backed portfolios. The VA’s response to these comments could influence loan performance metrics in the coming quarters and shape bank strategies for VA-originated loans.
What happens next—and who is watching
The VA has a formal comment process for the proposed partial-claim rules, inviting feedback from industry stakeholders, veterans' groups, and other parties. The response window was established to gather input as the department weighs potential revisions before finalizing the rule package.
Industry observers say a timely response from the VA will be critical for lenders preparing to adjust systems, training staff, and updating disclosures for veterans. In the coming weeks, trade associations expect to meet with VA officials to discuss the specific changes highlighted in the MBA letter and similar filings from other groups.
Key dates to watch include the finalization timeline for the reform act, the date the VA plans to publish its final rule, and the rollout schedule for any updated lender guidance. As always, mortgage rates, housing demand, and overall macroeconomic conditions will influence the pace and impact of these changes.
Implications for veterans and lenders
For veterans, the central question is whether the revised framework will increase certainty and limit the risk of foreclosure during financially difficult periods. The focus of the mortgage trade groups urge is to preserve homeownership while delivering predictable payment outcomes. If the VA adjusts the waterfall as urged, veterans could benefit from clearer options and reduced reliance on prolonged forbearances that complicate credit histories.
Lenders stand to gain from a simpler, more predictable process that reduces delays and administrative costs. A streamlined partial-claim path could improve servicing efficiency and reduce the risk of misapplication of mitigation steps. Still, lenders will watch carefully to ensure that any changes do not shift risk onto the guaranty program or lead to unintended increases in delinquencies down the line.
The conversation is ongoing, and the stakes are high for a large cohort of veterans who rely on VA-backed loans to stay in their homes. As the market continues to adapt to shifting rate environments and evolving regulatory standards, the VA’s response to the mortgage trade groups urge is likely to influence policy direction for years to come.
The focus remains on policy clarity, borrower outcomes, and cost discipline. If the VA acts decisively to simplify the loss-mitigation waterfall and align with peers, stakeholders say it could strengthen the VA loan program’s appeal in a competitive housing market while protecting the guaranty fund’s long-term health.
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