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 The departure of the biggest lenders from the U.S. Federal Housing
Administration program, which helps first-time homebuyers, could
translate into big losses for taxpayers during the next housing
downturn, analysts said. Officials at the FHA said they are not
alarmed by that risk.
Quicken along with JPMorgan Chase & Co, Bank of America Corp and
Wells Fargo & Co - all of the top four mortgage lenders in the
United States – are tussling with the FHA over how the agency deals
with loans that sour.
The three major banks, not satisfied with the way the FHA resolved
their complaints, have scaled back their lending through the
program. Now Quicken, the largest FHA lender, is looking at bowing
out as well, company founder and Chairman Dan Gilbert told Reuters.
It is also considering cutting the risk it takes in the program, he
said.
Quicken accounted for almost 6 percent of the FHA's loan volume in
the first half of 2015, or about $6 billion of loans, according to
trade publication Inside Mortgage Finance.
The FHA is arguing with lenders over when it is entitled to back out
of the insurance that its program provides. When a borrower gets an
FHA loan, the agency essentially guarantees the mortgage against
default, and promises to pay the lender if the homeowner reneges on
his or her obligations.
Unlike most other government home-loan programs, borrowers who get
FHA loans can make a down payment equal to as little as 3.5 percent
of the home purchase price, which makes the mortgages appealing to
first-time buyers who may struggle to pull together big upfront
payments. Because borrowers are paying for mortgage insurance, they
pay higher interest rates on their loans.
The FHA pays out on all default claims almost immediately, and only
reviews them later to make sure it got complete and accurate
information about borrowers when it first guaranteed the mortgages.
If it finds that it did not, it will demand that the lender
reimburse it for the insurance payout, the way a life insurer might
sue to recover funds paid out on a policy purchased by a smoker who
failed to disclose his habit on his application and died of lung
cancer.
Lenders including Quicken say the FHA demands repayments for even
the most minor of mistakes that a bank may make when extending a
loan, to force them to bear the agency's losses, making the
government's insurance an illusion.
When Wells Fargo and Bank of America balked at the FHA's strict
interpretation of the rules, the Department of Justice sued them.
The government has settled with Bank of America and JPMorgan Chase
over their FHA obligations, but not with Wells Fargo or Quicken.
Quicken, feeling like it was being strong-armed into settling, sued
the Department of Justice April 17 before the government sued it six
days later. Current fights over the FHA could have a big effect over
how the agency weathers the next housing crisis. The smaller lenders
that now make up most of the FHA's client base may struggle to stay
solvent whenever the next housing downturn comes, meaning when the
agency tries to push loans back to them, they may not have the
resources to repay the government.
About 80 percent of the loans in the FHA program are made by lenders
who are not banks, most of which are relatively small. That figure
compares with about 50 percent at the height of the crisis.
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"It could potentially be an issue in the next downturn," said Tom
Lawler, an economist who warned of an impending housing bubble in
2006 when he worked at Fannie Mae. But with mortgage credit quality
improving now, "you shouldn't lose sleep over it today," he said.
BETTER THAN FREDDIE
During the last crisis, the FHA performed better than Fannie Mae and
Freddie Mac, which together needed $188 billion of support, but it
still needed help — $1.7 billion from the U.S. Treasury.
The FHA acknowledges that having more thinly capitalized lenders may
be an issue in the next crisis. Ed Golding, principal deputy
assistant secretary at the Department of Housing and Urban
Development, which oversees the FHA program, said that the FHA is
charging enough for its insurance to absorb future losses. During
the financial crisis, the FHA played a critical role in keeping
mortgage credit flowing, guaranteeing more than a third of home
purchase loans being made in some years after the housing market
crash. That figure fell to 19 percent in 2014.
The FHA and lenders are fighting over how serious the underwriting
errors are in loans that go bad. Quicken said in its lawsuit that
the FHA's parent agency, the Department of Housing and Urban
Development, as well as the Department of Justice, both sought
penalties from the lender for overstating a borrower's income by
just $17, or for lending $26 too much on a $99,500 loan.
"Characterizing such 'transgressions' as false claims upon which any
damages should be owed ... is inconsistent with common sense, basic
principles of fairness, and the FHA's prior practices and
procedures," Quicken said in its lawsuit.
The DOJ lawsuit says that the lender submitted hundreds of loans for
FHA insurance that it knew did not meet the agency's standards, and
Quicken's problems were more serious than simple typos. It accused
Quicken of having a "culture that elevated profits over compliance."
A Justice Department spokeswoman would not address the Quicken
lawsuit, but said via email that "the conduct that the government
has pursued reflects clear, systematic, and knowing violations of
meaningful and substantive FHA requirements.
(Reporting by Dan Freed; Editing by Dan Wilchins and John Pickering)
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