1. Executive Summary

The COVID-19 mortgage relief system was widely presented as a lifeline for homeowners, including U.S. veterans with VA-guaranteed loans. But a close review of federal documents, market data, and oversight reports shows a different reality: the architecture of COVID-era relief primarily protected mortgage servicers, Ginnie Mae issuers, and investors, while shifting financial risk and long-term burden onto borrowers—especially veterans.

Under Section 4022 of the CARES Act, borrowers with federally backed mortgages could obtain forbearance for up to 360 days by attesting to COVID-related hardship.^[1] During forbearance, they were not required to make monthly payments. However, servicers were still obligated to advance principal and interest to investors in mortgage-backed securities (MBS), creating intense liquidity pressure, particularly on nonbank servicers that dominate VA and FHA servicing.^[2][3]

Federal responses focused on stabilizing the financial system:

• The Federal Reserve purchased agency MBS at unprecedented levels to keep markets functioning and borrowing costs low.^[4]
• Ginnie Mae expanded its Pass-Through Assistance Program (PTAP/C19) to provide emergency liquidity to issuers so they could continue making passthrough payments to investors.^[5]
• The Department of Veterans Affairs (VA) introduced a COVID-19 Home Retention Waterfall and the COVID-19 Refund Modification, which reimbursed servicers for arrearages and converted that debt into 0% junior liens against veterans’ homes.^[6]

These measures successfully shielded servicers and investors from large losses. But they did not guarantee straightforward, affordable, or fair outcomes for veterans. Instead, they created:

• A complex, servicer-controlled system for post-forbearance relief.
• Long-term debt via non-amortizing junior liens (Refunds) owed to VA.
• Widespread opportunities for error, denial, and abuse.

The Consumer Financial Protection Bureau (CFPB) later documented that servicers during COVID often gave inaccurate information, failed to evaluate borrowers for all available options, misapplied payments, and, in some cases, proceeded with foreclosure activity while assistance was still being discussed.^[7] The Government Accountability Office (GAO) found that CARES Act protections and post-forbearance options were implemented inconsistently, causing confusion and harm for borrowers.^[8]

In a 2019 audit titled Oversight and Resolution of Home Loan Defaults Report No. 18-03979-204 (https://ffj-online.org/wp-content/uploads/2022/10/VAOIG-18-03979-204.pdf), the VA Office of Inspector General found that VA’s Loan Guaranty Service was not providing adequate oversight of mortgage servicers—failing to ensure required loss mitigation letters were sent on time, not fully implementing a tier-ranking system to evaluate servicer performance, and not consistently monitoring defaulted loans, which increased the risk of financial harm to veterans.^[9]

Taken together, these records show that the COVID-era mortgage relief framework functioned as a hidden bailout for servicers and the mortgage finance system. Veterans—whose loans sit inside the Ginnie Mae system and are overwhelmingly serviced by nonbanks—were used as the shock absorbers.

2. Background: Pre-COVID Structural Weaknesses

COVID-19 did not strike a neutral, well-functioning system. It hit a VA mortgage ecosystem that was already structurally fragile: dominated by nonbank servicers, reliant on advance obligations, and monitored by an oversight framework that had long been criticized as weak.

2.1 The Rise of Nonbank Servicers

In the years leading up to the pandemic, nonbank mortgage companies captured a growing share of servicing for government-backed loans. By 2019, nonbanks controlled most VA and FHA servicing. The Financial Stability Oversight Council (FSOC) warned that these entities often operate with thinner capital and liquidity than banks and are highly dependent on short-term funding and advance obligations.^[3]

This meant the VA portfolio was heavily concentrated in the hands of entities least able to withstand a large and sudden spike in non-paying borrowers—precisely what COVID-19 produced.

2.2 Ginnie Mae’s Dependence on Servicer Advances

Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by VA, FHA, and USDA loans. To honor that guarantee, issuers/servicers must continue making scheduled payments to investors even when borrowers are delinquent. During normal times, this system works. But it becomes a pressure point during mass hardship.

In its 2020 Annual Report, Ginnie Mae acknowledged that the pandemic forced it to expand emergency liquidity support to issuers “as a safeguard against possible failures.”^[5] The system was not structurally resilient; it needed extraordinary support to survive.

2.3 VA Oversight Weaknesses

The 2019 VA OIG audit on home loan defaults found that VA had not implemented a robust oversight framework, including a failure to use its own tier-ranking system for servicers and weaknesses in monitoring default resolutions.^[9] This meant VA was not systematically identifying or correcting poor servicer performance.

2.4 Veteran Household Vulnerability

Veteran households, especially those with disabilities or fixed incomes, entered COVID-19 with:

• Higher disability and chronic illness rates.
• Greater reliance on fixed or limited income sources.
• Often lower liquid savings and higher household debt.

The Federal Reserve’s Survey of Consumer Finances data show that many families lacked three months of emergency savings even before the pandemic.^[10] For veterans already living close to the edge, a shock to income or expenses—even if temporary—was especially dangerous.

3. How CARES Act Forbearance Shifted Risk to Veterans

Section 4022 of the CARES Act gave borrowers with federally backed mortgages—including VA loans—the right to request forbearance for up to 180 days, with a possible 180-day extension, based merely on attestation of COVID-related hardship.^[1] This stopped immediate foreclosure threats and was a critical first step.

3.1 Relief for Borrowers, Liquidity Risk for Servicers

When borrowers entered forbearance, their monthly payments paused—but the obligation to make passthrough payments to investors did not. Servicers still had to advance principal and interest into securitization trusts. As millions of loans entered forbearance, this created a severe liquidity crunch, particularly for nonbank servicers with limited capital buffers.^[2][3]

3.2 Market-Focused Interventions

In response, policymakers focused on stabilizing the financial system:

• The Federal Reserve launched large-scale MBS purchases to support market functioning and keep mortgage rates low.^[4]
• Ginnie Mae activated PTAP/C19, allowing issuers to obtain funds to meet their passthrough obligations and avoid defaulting on their guarantees.^[5]

These steps helped prevent a collapse in the mortgage market, but they did not directly address how individual borrowers—especially veterans—would exit forbearance without suffering harm.

3.3 Post-Forbearance: Where Risk Was Pushed

Rather than adopting simple, automatic post-forbearance solutions (like principal-reducing modifications or standardized deferrals), VA implemented a multi-step Home Retention Waterfall that required servicers to:

• Collect updated information from borrowers.
• Evaluate hardship and repayment capacity.
• Apply a series of options in sequence (repayment plan, modification, Refund).

This meant the financial cost of forbearance would ultimately be dealt with through complex, servicer-controlled processes. Many veterans emerged from forbearance into a maze of paperwork, inconsistent guidance, and opaque decisions with life-altering consequences.

4. The VA Waterfall: Servicer-Controlled Relief

VA Circular 26-21-13 set out the COVID-19 Home Retention Waterfall, instructing servicers to move through a series of loss-mitigation options intended to keep veterans in their homes.^[6] In practice, the waterfall concentrated decision-making power in the hands of servicers and left veterans with no direct way to seek relief from VA itself.

4.1 Servicers as Gatekeepers

Under the waterfall, servicers were responsible for:

• Determining whether a veteran had experienced COVID-related hardship.
• Assessing income and “ability to pay.”
• Applying each step of the waterfall in sequence.
• Deciding whether to submit a Refund request to VA.

Veterans could not independently apply for a Refund or modification. If the servicer misinterpreted the rules, mishandled documents, or simply refused to fully evaluate the borrower, there was no automatic backstop.

4.2 Conflicts of Interest

Servicers earn servicing fees from loans in their portfolios and can profit from certain delinquency-related activities (fees, advances reimbursed through claims, etc.). They also face operational costs when processing modifications and Refunds. The incentives are not naturally aligned with maximizing relief for borrowers.

CFPB supervisory work during this period documented significant failures by some servicers, including failure to evaluate borrowers for all available options, providing inaccurate information, and initiating foreclosure procedures inappropriately.^[7] These same servicers were often responsible for VA borrowers as well.

5. Inside the Refund Program: Servicer Profit, Veteran Debt

The COVID-19 Refund Modification was the centerpiece of VA’s response to deep delinquency. It allowed VA to purchase (“refund”) a portion of the loan from the servicer and establish a new repayment structure.^[6] On the surface, this appears helpful. In reality, it primarily functioned to protect servicers and shift long-term obligation onto veterans.

5.1 How Refunds Worked for Servicers

When a Refund was approved:

• The servicer was reimbursed for missed principal and interest.
• Certain fees, escrow shortages, and allowable advances were covered.
• The delinquent portion of the loan was removed from the MBS pool.
• The servicer’s financial exposure to those arrearages effectively ended.

In other words, the Refund program made servicers whole. It removed the direct impact of COVID-related nonpayment from servicer balance sheets and shifted it to VA.

5.2 How Refunds Worked for Veterans

For veterans, the refunded portion of the debt did not disappear. It was converted into a 0% interest, non-amortizing junior lien payable to VA and secured by a promissory note, typically due upon sale, refinance, or payoff of the primary mortgage.^[6]

This structure:

• Increased the veteran’s total indebtedness.
• Encumbered the veteran’s home equity with a second lien.
• Reduced flexibility to refinance or sell in the future without repaying the lien.

Many veterans likely did not fully understand that they were taking on a long-term lien that would reduce their net proceeds when they eventually sold or refinanced.

5.3 A Downward Risk Transfer

Viewed structurally, the Refund program:

• Absorbed servicer losses at VA’s level.
• Then reassigned eventual repayment responsibility to veterans.

The program did not erase the cost of pandemic-era nonpayment; it simply moved that cost away from servicers and investors and anchored it to veterans’ homes for years, sometimes decades, to come.

6. Evidence of Servicer Misconduct and Systemic Failures

The design flaws of the VA system were compounded by documented misconduct and operational failures at many servicers during the COVID-19 period.

6.1 CFPB’s Supervisory Findings

In its 2022 Supervisory Highlights, the CFPB reported that mortgage servicers:

• Failed to provide accurate and complete information about available options.
• Improperly denied certain borrowers assistance or failed to review them for all options.
• Misapplied payments and mismanaged escrow accounts.
• In some instances, moved forward with foreclosure activity while borrowers were still exploring relief options.^[7]

These practices echo the abuses seen during the 2008 crisis and confirm that relying on servicers as gatekeepers creates predictable harm.

6.2 GAO’s Critique of CARES Implementation

GAO’s work on CARES Act mortgage forbearance found that borrowers sometimes received inconsistent information, and that implementation of post-forbearance options varied by servicer.^[8] This variability is especially problematic in a VA context where access to key protections (like Refunds) depended entirely on servicer evaluation.

6.3 VA’s Oversight Failures

The 2019 VA OIG audit of home loan defaults documented clear weaknesses in VA’s oversight of servicers, including insufficient monitoring, failure to fully implement a servicer-ranking system, and gaps in how VA ensured servicers complied with program requirements.^[9] These problems predated COVID and were still present when VA deployed its COVID-era relief programs.

7. 2008 vs. COVID: How the Same System Failed Again

The failures seen during COVID did not arise in a vacuum; they echo the 2008 housing crisis. Key patterns repeated:

• Servicers were financially fragile and dependent on advances during spikes in delinquency.
• Federal intervention prioritized stabilizing financial markets and institutions.
• Relief programs were complex, servicer-driven, and prone to misapplication.
• Borrowers experienced confusion, delays, wrongful denials, and foreclosure exposure.

The difference this time is that VA borrowers—veterans and their families—were at the center of the system’s most fragile segment: Ginnie Mae securitization dominated by nonbank servicers.

8. What Should Have Happened Instead

The outcomes veterans experienced during COVID were not inevitable. A different policy design could have delivered meaningful, straightforward relief while still preserving financial stability. Instead of building a servicer-centric waterfall anchored in junior liens, VA and other actors could have adopted reforms that aligned relief structures with the realities of veteran households.

8.1 Direct Veteran Access to VA Relief

Veterans should not have been forced to rely solely on servicers to access assistance. VA could have created:

• A direct online portal for hardship applications.
• A secure document upload system.
• VA-run review teams to assess eligibility and make determinations.
• A clear appeals process when servicers denied or mishandled relief.

8.2 Automatic, Standardized Post-Forbearance Options

VA could have followed FHA and the GSEs in implementing standardized post-forbearance solutions that:

• Reduced payments to a consistent, affordable target ratio.
• Used clear formulas for interest rates and terms.
• Required minimal documentation and discretion.

8.3 Real-Time Oversight and Data-Driven Enforcement

VA should have actively monitored servicer behavior in real time by:

• Collecting data on approvals, denials, and outcomes.
• Sampling denial files to check for proper application of rules.
• Correcting systemic errors and sanctioning repeat violators.

8.4 Eliminating Junior Liens as the Primary Relief Mechanism

Veterans needed genuine relief, not long-term encumbrances. VA could have:

• Emphasized principal reduction and rate-term modifications rather than junior liens.
• Limited the use of Refunds to extreme cases.
• Built pathways for automatic lien forgiveness over time or upon certain conditions.

9. Veteran Harm Analysis: Delinquency, Foreclosure, Debt

While comprehensive VA-specific data is limited, multiple sources indicate that VA borrowers experienced:

• Higher spikes in serious delinquency than many other segments.^[5][11]
• Choppy, inconsistent experiences exiting forbearance.
• Foreclosure exposure despite nominal eligibility for assistance.
• Long-term financial burdens from junior liens added during “relief.”

Veterans who did everything asked of them—entered forbearance, responded to servicer outreach, filled out forms—often still found themselves in danger of losing their homes or trapped in complex repayment structures.

10. The Human Impact: Stories Behind the Data

Behind each policy and statistic are veteran households facing very concrete consequences: interrupted sleep, deteriorating health, strained relationships, and the real fear of homelessness or forced sale.

Many veterans report:

• Being told different stories by different servicer representatives.
• Needing to resend the same documents multiple times.
• Receiving conflicting letters about their status.
• Seeing their credit damaged by delinquency reporting tied to servicer errors.
• Receiving foreclosure notices while they believed they were still “under review.”

These experiences mirror what was seen during the 2008 crisis, but for veterans they are especially painful because they occur against the backdrop of service, sacrifice, disability, and the expectation that the VA system exists to protect them.

11. Policy & Oversight Recommendations

To prevent similar harm in future crises and to address ongoing vulnerabilities, this report recommends:

11.1 Congressional and GAO Action

• Congressional hearings focused specifically on VA loan servicing during COVID-19.
• A GAO audit targeting VA’s oversight of servicers and the outcomes of the COVID-19 waterfall and Refund programs.^[8]

11.2 VA Administrative Reforms

• Create a direct hardship-application portal for veterans.
• Establish internal VA review teams and appeal processes.
• Implement real-time audits of servicer decisions during emergencies.
• Limit the use of junior liens and explore principal reduction where appropriate.

11.3 Ginnie Mae and FSOC

• Strengthen capital and liquidity requirements for nonbank servicers inside Ginnie Mae programs.^[3][5]
• Condition issuer participation on meeting borrower-protection standards during crises.

12. Conclusion: COVID Mortgage Relief Was a Policy Failure

The COVID-19 mortgage relief system accomplished one thing exceedingly well: it preserved the functioning of the mortgage finance system in the face of a historic economic shock. But it did so by shifting the costs and risks downward—onto borrowers, and in particular onto veterans whose loans anchor a fragile segment of that system.

That is not an accident of history. It is the result of policy design, institutional priorities, and a longstanding pattern of treating borrower protections as secondary to market stability. Veterans deserved better: transparency, simplicity, fairness, and relief that did not leave them with hidden liens and long-term financial scars.

Recognizing this failure is essential. Acting on it—through oversight, reform, and enforcement—is what will ensure that the next time the nation faces a crisis, veterans are not asked to carry the weight for everyone else.

References

1. U.S. Congress. (2020). CARES Act (Public Law 116-136). Retrieved from

   Click to access PLAW-116publ136.pdf

2. Kaul, K. (2020). The need for a federal liquidity facility for government-loan servicing. Urban Institute. Retrieved from

   Click to access the-need-for-a-federal-liquidity-facility-for-government-loan-servicing_1.pdf

3. Financial Stability Oversight Council. (2019). Nonbank mortgage servicing: Market profile and risk analysis. U.S. Department of the Treasury. Retrieved from

   Click to access FSOC2019AnnualReport.pdf

4. Pence, K. M. (2022). Liquidity in the mortgage market: How does the COVID-19 crisis compare to 2008? Board of Governors of the Federal Reserve System. Retrieved from

   Click to access 2022039pap.pdf

5. Ginnie Mae. (2020). Annual report 2020. Retrieved from

   Click to access annual_report20.pdf

6. U.S. Department of Veterans Affairs. (2021). VA Circular 26-21-13: COVID-19 home retention waterfall and COVID-19 Refund Modification. Retrieved from

   Click to access 26_21_13.pdf

7. Consumer Financial Protection Bureau. (2022). Supervisory highlights: Issue 26 (Summer 2022). Retrieved from https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-26-summer-2022/
8. U.S. Government Accountability Office. (2021/2022). Mortgage servicing: COVID-19 forbearance (GAO-21-554 and related work). Retrieved from https://www.gao.gov/products/gao-21-554
9. VA Office of Inspector General. (2019). Oversight and Resolution of Home Loan Defaults (Report No. 18-03979-204). PDF archived at

   Click to access VAOIG-18-03979-204.pdf

10. Board of Governors of the Federal Reserve System. (2020). Survey of Consumer Finances 2019. Retrieved from

    Click to access scf20.pdf

11. Urban Institute. (2021). Housing finance at a glance: Monthly chartbook. Retrieved from https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook