"We come are back to the original question: why is this rate not available to the VA loan program where the federal government secures a portion of the loan equivalent to that down payment? (The VA program is a renewed source of financing these days it seems) "
First, a couple of clarifiying points:
(1) The Veterans Administration does not lend money nor does it advance any funds for the VA Home Mortgage benefit. The VA issues an insurance guarantee to the lender making a loan underwritten in accordance with VA's lending guidelines. The insurance guarantee protects the lender from loss up to 100% of the original loan value should the borrower default on the loan.
(2) The VA Funding Fee paid by the borrower at closing is paid over to Ginnie Mae (GNMA or Government National Mortgage Association), the entity which provides the insurance guarantees on all FHA, VA, and USRDA loans. Ginnie does not buy loans like Fannie and Freddie; it simply issues the guarantee. Ginnie, unlike Fannie or Freddie, is backed by the full faith and credit of the United States.
(3) Mortgage insurance provided by private insurors, commonly known as PMI, is required by Fannie and Freddie on all loans they purchase with LTVs above 80%. PMI policies max out protection to the lender at 35%, although most policies provide much less coverage.
(4) Fannie Mae and Freddie Mac buy the bulk of VA guaranteed and FH insured motgages made by banks and lenders. Fannie and Freddie sell bonds to investors to raise capital to buy loans from banks. The huge secondary market provided by Fannie and Freddie create the low interest rates available to borrowers, as long as investors have faith in the performance of mortgages purchased by Fannie and Freddie.
Now the answer to your question: VA, FHA, and USRDA loans carry higher risk to investors because of (a) the low or zero down payment, (b) relaxed credit standards compared to those required by Fannie's and Freddie's conventional loans, (c) a different standard for projecting income stability than required by conventional loans, and (d) reduced asset requirements from Fannie and Freddie guidelines.
The increased risk is offset by the 100% guarantee from Ginnie Mae, but that guarantee comes with increased liability for the lender. Since FHA, VA, and USRDA guidelines permit wide discretion to lenders in approving loans (compared to conventional underwriting guidelines of Fannie and Freddie), the lenders carry a much higher liability to Uncle Sam for the perforamance of those loans.
And unlike poor performance with conventional loans, a lender who makes too many non-performing FHA, VA, or USDA loans can face stiff civil penalties or even criminal prosecution.
The result of the balance of risk/liability vs guarantees means that rates for Gov't insured loans vary from very close to conventional rates (as over the past year), to below conventional, or now to rates that run higher than conventional rates.
But it gets worse.
Fannie Mae and Freddie Mac now require a minimum credit score for VA and FHA loans of 580; many lenders who rely on other lenders for lines of credit to fund loans are now forced to raise credit scores on Gov't inured loans to 620. FHA, VA, and USRDA have NO minimum credit scores. The minmum credit score requirements, in addition to rising rates, demonstrates a concern on the part of lenders about the increased risk of default of loans underwritten to FHA, VA, or USRDA standards in spite of the 100% insurance guarantee to lenders.... more