Congress must stop Biden's VA mortgage bailout — before it’s too late 

We are now witnessing an outcry from Democrats, loan servicers and the media over the prospect of Congress scaling back the Department of Veterans Affairs's new mortgage bailout program, the Veterans Affairs Servicing Purchase program. If the program is curtailed as proposed by Rep. Derrick Van Orden (R-Wisc.), they warn, tens of thousands of veterans — perhaps as many as 80,000 — will lose their homes.  

But the reality is quite different and far more dangerous. Left unchecked, the program risks turning veteran homeownership into a costly, unsustainable entitlement for which taxpayers will be left holding the bag. 

No one wants to see the nation’s heroes lose their homes. But a housing finance system that eliminates the possibility of foreclosure is inherently unsustainable, and that is exactly what the Veterans Affairs Servicing Purchase program does. Launched under the Biden administration, the program upends the traditional balance by having the VA buy troubled loans, hold them on its books, and absorb all future losses while servicers walk away whole. 

Even more troubling, the program's overly generous terms invite strategic default. Veterans with 6 percent or 7 percent mortgages have a strong incentive to stop paying, just to qualify for a government refinance at 2.5 percent. Naturally, servicers love this. Under the traditional VA program, they shared up to 25 percent of losses; now the Veterans Affairs Servicing Purchase program makes them whole, giving them every reason to push borrowers into the program. It privatizes gains and socializes losses.

This isn’t a safety net — it’s a moral hazard factory that risks destabilizing the VA loan program and exposing taxpayers to massive losses. 

The sheer scale of this program is already alarming. Since its inception in May 2024, more than 15,000 loans have moved into the pipeline, and the VA budgeted for 40,000.

Prior to VASP, private servicers shared the risk and had a clear incentive to work with borrowers to avoid foreclosure. This system provided veterans with affordable, no-down-payment loans while containing taxpayer exposure.

Today, those same workouts are harder to achieve due to higher interest rates. For most delinquent borrowers, the solution is straightforward: sell the home. AEI Housing Center analysis shows that roughly 84 percent could sell, cover their mortgage, arrears and closing costs and still walk away with an average of $128,000, thanks to a 50 percent jump in home values over the past five years. Instead of encouraging this dignified exit, however, VASP fosters dependency and shifts financial risk to taxpayers.

While selling is not an option for all delinquent veterans, this points to a deeper problem: many of these loans were made to borrowers with high debt loads, poor credit and little savings. That’s a failure of underwriting, not a justification for permanent bailouts.

This program is just the tip of the iceberg of programs implemented under the Biden administration. Other agencies, including FHA, Fannie Mae and Freddie Mac, offer partial claims, modifications and deferral programs that allow missed payments to be tacked on to the end of loans — often combined with substantial payment reductions. These programs can let borrowers live virtually mortgage-free for years, fostering expectations of eventual forgiveness. In many cases, it’s a better deal than renting — with the added bonus of keeping any home price appreciation.

Supporters argue that these loss-mitigation programs save money long-term, since they avoid costly foreclosures, but we heard the same thing when the federalization of student loans helped fund Obamacare. We know how that ended: ballooning balances, widespread defaults and political demands for massive taxpayer bailouts.

In fact, the parallels between the Veterans Affairs Servicing Purchase program and the student loan debacle are striking. The 2010 Student Aid and Fiscal Responsibility Act put student loans on the federal balance sheet. Then income-driven repayment and forgiveness schemes shifted the burden to taxpayers, while pause after pause encouraged borrowers not to pay, creating an enormous moral hazard.

How this may end should frighten every veteran and American, as it threatens the stability of the VA’s loan guarantee program. What we need is not another massive bailout but more prudent underwriting upfront, so borrowers are set up to succeed, not fail. Otherwise, like every other government "rescue," this will start small and swell into an unsustainable, permanent fixture. 

Congress needs to act now, before the dangerous Veterans Affairs Servicing Purchase program becomes too entrenched and impossible to unwind. 

Tobias Peter is co-director of the American Enterprise Institute’s Housing Center.