Lending giants shy away from FHA loans

WASHINGTON – Sept. 23, 2014 – The nation's largest home lenders are curtailing their involvement in Federal Housing Administration (FHA) loans, which have small downpayment requirements that help first-time buyers and lower-income Americans become homeowners.

These lenders say they're worried that they'll be penalized if underwriting errors occur and the loans default. As a result, they're backing away from issuing the loans.

FHA loans plummeted 19 percent in the nine months ending June 30 compared to a year earlier.

Wells Fargo, the nation's largest home lender, saw FHA originations drop 82 percent in the first six months of this year compared to the same time period in 2013, according to Inside Mortgage Finance data. Bank of America saw a 72 percent drop in that time, followed by JPMorgan with a 55 percent drop.

"The real question to me is: Should we be in the FHA business at all? And we're still struggling with that," JPMorgan CEO Jamie Dimon said in an earnings call with investors in July

Lenders' attitudes toward FHA loans turned sour after recent Department of Justice (DOJ) and federal regulator settlements. JPMorgan Chase & Co., Bank of America Corp., and others have already paid more than $3 billion in fines for originating faulty FHA loans during the housing bubble.

"A big issue is the DOJ settlements and their impact on the lending attitudes of the banks, which is clearly the elephant in the room," says Brian Chappelle, a former FHA official and partner at Potomac Partners LLC, a consulting firm for lenders in Washington. "The government is worried about access to credit. They're looking at volume numbers, and they know it's a serious problem."

HUD and Treasury officials recently met with bank executives at the White House to talk about improving FHA processes. Julian Castro, secretary of the Department of Housing and Urban Development, which oversees FHA, says the agency does seek to ease credit by rewriting clear rules for lenders on when they will be forced to pay the cost from loans that go bad.

"With all our efforts, I want to send a simple message to lenders: Let's work together," Castro said in a prepared statement at the Bipartisan Policy Center Housing Summit on Sept. 16. "Many have been reluctant to lend because they fear unanticipated consequences. They need to be able to manage their risk better – and so does FHA."

Anthony Hsieh, CEO of LoanDepot.com, the third largest FHA lender, urges government regulators to do something fast. "Access to credit is tightening across the board and the number of people who can get a home is shrinking to the point of code red," Hsieh says.

Source: "FHA Loans Plunge 19% as Lenders Haggle with Officials," Bloomberg (Sept. 19, 2014)