[David] Folks, we’re back with Pavan Agarwal, our AI expert, and we’re going to get into VA lending. Pavan, there is a problem and I want you to outline the problem for us.
[Pavan] Yeah, so the VA has really great guidelines to help veterans and they were written, whatever, 40 years ago, 50 years ago and they don’t like evolve. They don’t like adjust to the current needs and the situation and right now, what has happened in the last seven years with this high inflation environment, we’ve seen this massive run up in home equity. So Americans today are sitting on $40 trillion of home equity. You just stop and think about that. But that’s as much home equity as there is national debt. If you just swap the two, then we don’t have any debt or you can’t do that. So the point is that the VA never assumed that you would have 20%, 30% increase in home prices and home values within a year or two, and that’s what’s happened. Okay. And so their guidelines were designed to help veterans. It was designed to make sure the veterans always had access to the lowest payments and the best options and the easiest options.
[David] At least payment, if they want the least down payment the best payment options. But we have a problem that but yeah, so let’s again, let’s get in defining the problem because you have a solution I know right behind. So, Pavan, we know how the VA program was designed. It’s been there for the benefit of the veteran, which is a wonderful thing and we want to honor our veterans. But what’s the problem as it relates to what’s happened? Because the guidelines and the thing the program was created 40 years ago.
[Pavan] Yeah, so the program has created to get veterans into homes easily with zero down payment. mean, FDR signed that into law, or the 1940 something, and since then the VA got smart and did the right things and said, Hey, if interest rates drop and your payment is going to get reduced, then you can do a VA refi and which is great and then they said, okay, then you can finance your closing costs. If there’s equity, you could finance your closing costs into the VA refi, which makes sense. You want to make housing as affordable as possible to the veteran. But the VA never assumed that there would be such massive run-up in home equity so fast and so there’s no circuit breaker in that. There’s no protection in that. So we literally are seeing deals come across, and our AI rejects them. So, Angel AI rejects these deals, although they’re tech…
[David] It’s a loan applications.
[Pavan] Yes, yes. And this happens. Now, we analyze data. We can see this in mass numbers. This is the kind of patterns.
[David] Are we talking about refinances or purchases?
[Pavan] We’re talking about refinance. This is a refinance problem. So let me give you an example of a real deal. This is a real situation. This was a borrower in Texas. Hold on, I’m getting the exact numbers. Give me a minute here. I got it right here on my notes. OK, so the exact numbers. The lender stripped away $37,000 of home equity and saved the veteran $5 a month. Right? I mean, and no one with good conscience can do that, right? If you just do the quick math, you know, that’s going to take like 7,400 months to ever break even on that thing.
[David] What does that equate to when we have a $5 it is stripped out $37,000 in equity. What does that mean? They would they’d have to keep that mortgage for how long?
[Pavan] For 616 years.
[David] My gosh. Yeah. That is it. So you when you your system is kicking these out.
[Pavan] Is kicking these out, right? So technically that meets the VA guidelines.
[David] But these are not getting anything out of the mortgage industry per se.
[Pavan] Anything that goes to angel AI will get declined. But, but you know, what’s happening is if it gets to angel AI declines says don’t do it.
[David] The point of it is, that you said Angel AI is kicking these out, but that’s because your technology is written such a way is to protect the veteran and to make sure they get the maximum benefit. We’re though at loan. If it were not going through Angel AI would be going through a regular system, the regular mortgage lending industry lender without angel AI and would be getting approved because they technically qualify.
[Pavan] Correct. Yeah, technically on the plain language of the reg, it meets the plain language of the reg. So, it’s getting through and I know like this particular loan, I know it closed at one of the big lenders. in July, I rejected it and the broker took it to another lender and it closed. Right. And this is one of thousands, tens of thousands of loans that are closing. So, you know, we’re kind of at, in the interest rate markets at a high on the 10 year and we can see with this war ending and things straightening out again, we’re to see this interface drop half a point, maybe hopefully even a point. And we’re going to see a lot of this stuff where a lot of borrowers are going to be sold on the payment savings. They’re sold on the payment savings, but no one ever explains to them how much of their equity they’re losing and this equity is so important because that’s their retirement. That’s when they retire, they need that money to fund their life. That’s when you go either you sell the home, take the equity out and move down into a smaller house and then use that equity live off or you get a reverse mortgage. So you’re literally by doing this for $5 a month, you’re taking away that veteran’s retirement. But that’s, mean, how do you explain $5 a month savings for…
[David] Do you have any insights as to why they applied for that loan? What were they trying to achieve? or was that where there was a marketing where they’re going out and marketing to the veteran and some benefit, is that right?
[Pavan] Yes. Yes. I mean, it’s just general marketing, refinance, lower your payment, which is fair, which is the marketing was perfectly fine. So, the consumer received the marketing, hey, I can lower my payment. They called the broker. The broker said, yes, you can lower your payment and I worked it out. Hey, you can save $5 a month in it. And the way it’s sold, which I don’t know exactly what the broker said, but this is something that people can look into is if it’s sold as, it’s not going to cost you anything and that’s how loan officers are loose with the language, right? and it does cost them something, but, if it’s sold as you don’t have to bring any money to closing, which is usually how it’s sold. Okay. And which is fine. When you say you don’t have to bring any money to closing in the borrower interprets that in his head as, I don’t have to pay anything. Right. It’s never explained to the borrower that no, you are paying is just hidden. It’s hidden in your equity just got ripped out. This is as bad as the pay option arm. It’s like people would refinance and get these pay option arm and then tack on $30,000, $40,000 of fees and take away all that home equity. This is the same exact thing. They turn these lenders, I don’t blame the brokers, I blame the lenders that are actually funding it, they’ve turned the VA mortgage into a pay option arm. And we all saw what that did to the industry 20 years ago. So here’s my advice to lenders is the way when we originate a loan and the way that the ethics and the core of angel AI is ask, Angel and I asked itself, would I give this loan to my mom or to my son? and if I wouldn’t do it for my own family, right. And if it’s not a good deal for my own family, it’s not a good deal for anybody. OK, so and no one in their no lender, no loan officer in their right mind would sell a five dollar savings to thirty seven thousand dollars of equity stripped away to anybody. Right.
[David] No, no, no. Well, I think that…
[Pavan] So just stick with the ethics.
[David] Yeah, stay with it. And I think lenders that are listening to this, I think the most important thing that you walk away from, I do legal expert witness work. I testify on behalf of the industry, defending the industry when we have attorneys out there that are going after industry. But this is indefensible. If you’re doing this type of lending, I’m just telling you lenders, you need to take a look at this because whether you’re a loan officer or a business owner, this opens you up to liability and I’ll just leave it at that. And I want to go into now, how is it that using angel AI protects them? What is it that you put into your system? That broker is probably a little frustrated because they didn’t get to make a commission on this deal. They had to go get it funded elsewhere, but you’re actually protecting my opinion, the broker and that company from potential problems down the road, even though it’s all done somewhat according to the guidelines, which is again, the problem.
[Pavan] It’s technically to the guidelines, right? So VA can’t say you violated the guidelines. It’s technically to the guidelines. It’s not in the spirit of the guidelines, but it’s to the technical wording of the guidelines. I can’t imagine anybody at the VA ever imagined a use of the program in this way. I don’t think that was ever their intention.
[David] Yeah, because we back when that thing was designed, we never had the kind of appreciation we’ve had on home values. For example, let’s talk about the solution. When you do provide as a solution is that you’re then going in and doing an analysis alone. Talk about that.
[Pavan] Yeah, so when you go to Angel AI, there’s an app in there called VA ReFi Calculator. And any consumer can use it, any broker can use it and it’ll ask you a couple of basic questions like, what is your current interest rate? What’s your current payment? And what’s your homeward? And it’s going to tell you whether there is enough benefit to the ReFi or not and it’ll breaks down the benefit. Like basically the recoup that I just did. Like in this example, it would say, you know, heck no, right? It’s like, do a loan that’s going to take 600 years to pay. So it’s a reasonable benefit analysis that does and says, is it reasonable for you to do this or not? And it’s just common sense, you know.
[David] It is common sense, but we’re noticing when it comes to being able to make a commission, some common sense gets squished or pushed out.
[Pavan] Yeah, well, you know, it’s we can take that into a more spiritual and theological approach. you know, it I’m sure there’s a lot of scripture that you can that you can you can cite on as to why people do these things.
[David] Yeah, it’s doing to others what you want to have done it yourself. I mean, I think you open the door for all kinds of things. But let’s get into talking about when this should be happening. If someone is using your technology, Pavan, they’re going to come to that determination, realization, almost immediately upon putting in that information, the borrower information, whether it be the borrower or the lender.
[Pavan] Yeah, in seconds. I’ll tell you immediately. Don’t do this and it will tell you why and I’ll break it down for you.
[David] And explain it exactly. What are some other scenarios where you’re seeing where veterans are being? I’m not gonna say abused or any other lending situation, but I mean, be taken advantage of, or not provided. I think it’s best saying not provided the best financial advice.
[Pavan] Yeah, well, think here’s another issue. This is not just for veterans, but across the board. People are skirting around the ability to repay rules that were passed in 2008, which made a lot of sense and basically, don’t put a person in a house if they can’t afford it and then there’s ways that people are getting around the guidelines, both whether it’s VA or HUD or Freddie Fannie guidelines. Either they’re getting around or just flat out ignoring the guidelines and the number one thing is tax bills. In a lot of states, when you get the tax at closing, the tax statement at closing, and then after you purchase house, it’s going to get reassessed and a lot of lenders will close it on the tax bill and not on what the new assessment will be. Okay. And so if your ratios are low, doesn’t matter, but a lot of VA loans, a lot of FH loans, they’re right on the borderline, like, you 55%, 56% LTI, DTI, right? and that extra $50, $100 increase in taxes, they don’t, they can’t afford the payment anymore. Right? So you’re setting up these borrowers and they’re expecting a payment to be, you know, whatever X, right and then a couple of months into the servicing, when the new tax bill is issued, now suddenly they get sticker shock and the payment goes up $100 or $200 because the taxes went up. And now you’re pushing them to default. And you’re taking a family who qualified for that house and it was tight, but they qualified and they figure out a budget and a plan how they can make that payment and then suddenly the tax bills go up and you as a lender had a responsibility, you knew the tax bill is going go up. We all know that. There’s a few states like California Proposition 13 and stuff where there’s some reasonableness about the tax bill, but in most states it goes up dramatically once the house is sold. Then if it’s a new construction, in California they have these things called Mellorooze tax and other states have that too. A new construction, you have all these extra taxes that come on. Once you buy it from the builder. Once you drive it off, the builder’s locked, right? Okay, and if you don’t include those taxes, and you’re gonna have a big sticker shock afterwards, right? The regs say you’re supposed to, but people ignore it and the auditors miss it. Auditors don’t even know to look for this stuff.
[David] What other things are we that is angel AI catching that lenders should be aware of that can save them from liability and more importantly help the consumer in a more effective way.
[Pavan] Yeah, well, see, like this kind of stuff is the reason AI can cache this is because it has all the data, right? It’s infinitely connected. It’s got the tax data and so forth. And most lenders, like when they review the settlement statement and they review the tax statement from the account, right? They don’t have people, and I think this is less, it’s not exactly willful. This is more incompetence, right? You don’t have people that are trained to understand this. I think at the top of the house, lenders understand it at the top of credit and the writing understands it. But in the weeks as these documents come in, people don’t know what to do and they just take whatever SQL tells them and drop it into their legacy system and moves on. There’s no intelligence, right? And those systems aren’t exactly, they’re not integrated. They don’t get the data automatically, right? And they also don’t understand how to project forward and how to predict defaults, right? These are all things that AI does and to look for these patterns and say, okay, wait, you’re number one, you’re supposed to the recs, you’re supposed to use the new tax rate. And number two is, is you have to be able to get that in an automated manner, right? And, and another example is declining income on businesses. mean, Fannie Mae has specific rules on how to treat that, right? And, and you need to have an AI that can, because it’s hard. got to read the tax returns clearly, and you got to read the P&Ls clearly, and you got to understand how to figure out whether the income is declining within the parameters that Fannie Mae said and if it’s not, if it’s within the parameters, you’re okay. You can move forward. If it’s not, then you got to use a lower income and all these things. So like processors and underwriters have to remember those rules, and they have to know how to read a tax return, right? That’s CPA level work, right? And then can think of CPAs that I worked with that couldn’t read a tax return correctly, right? So we’re asking process and underwriters to read the complex P&Ls and tax returns, right? So just like drop it in Angel AI, read it and analyze it and it’ll tell you, hey, the income is declining, so you got to adjust it downwards and this is what you really qualify for and when you make those kinds of mistakes in underwriting, and Fannie Mae audits you, or HUD audits you, you’re going to get an in-demo repurchase. So it’s going to cost you a bite.
[David] Yep. This is a great example of all the many, many things, the benefits of using angel AI.
[Pavan] But not only that, but you’re saving potentially a borrower from getting into a house he can’t afford. That’s the number one most, as lenders, our number one priority is to make sure that the borrower can make his payments. It’s as simple as that. Forget the guidelines, forget everything else. It is unethical to give a loan to someone if they can’t afford it and frankly, that’s the reason we survived through 2008. We’ve been doing this 45, 46 years. That’s the philosophy of the company. We never did those kinds of option arms and things like that. Things that we could have made a lot of money really fast, but we didn’t do it because that’s just not who we are. It’s about helping borrowers. It’s about helping the community.
[David] Which is at the core what Angel AI is about, because at the core, that’s what you’re about. I’ll tell you, it’s always good to have you come on the podcast. We got an important message out recorded and record a little over 20 minutes. We want this to go out for our lenders as soon as possible. Be aware of this lenders. There are risks out there by doing every loan possible. Y ou’re actually creating liability for yourself, even though it may fit the guidelines. Get familiar with Angel AI to help you mitigate that risk. thanks for being here, friend.
[Pavan] Thanks David. Cheers.
[David] Cheers.
