Could big banks doing FHA loans be on the way back?
When the Department of Housing and Urban Development Secretary Ben Carson announced Monday that HUD reached an agreement with the Department of Justice to decrease the use of the False Claims Act as a means of punishing Federal Housing Administration lenders, Carson said that HUD wants the big banks to return to FHA lending. And according to FHA Commissioner Brian Montgomery, that’s exactly what is going to happen.
Speaking Monday at the Mortgage Bankers Association Annual Conference in Austin, Montgomery said that “a few” banks have already committed to returning to FHA lending now that the government won’t be using the False Claims Act as often as it was before.
In recent years, many of the nation’s largest banks, including JPMorgan Chase and Bank of America moved away from FHA lending after the government began using the False Claims Act to extract massive settlements from FHA lenders, including Wells Fargo. On several occasions, JPMorgan Chase CEO Jamie Dimon specifically blamed the government’s use of the False Claims Act as a significant reason for the bank exiting FHA lending.
In his 2015 letter to shareholders, Dimon said that the bank drastically cut its FHA lending in 2015 due to the risk of a False Claims Act charge from the government, among other factors. The following year, Dimon further expanded on the impact of the False Claims Act on the bank’s lending practices.
“The FHA plays a significant role in providing credit for first-time, low- to moderate-income and minority homebuyers,” Dimon wrote in 2016. “However, aggressive use of the False Claims Act (a Civil War act passed to protect the government from intentional fraud) and overly complex regulations have made FHA lending risky and cost prohibitive for many banks.”
Dimon also wrote that False Claims Act settlements “wiped out a decade of FHA profitability,” adding that FHA lending is too expensive for lenders, even without the threat of a False Claims Act settlement.
“This has led us to scale back our participation in the FHA lending program in favor of less burdensome lending programs that serve the same consumer base – and we are not alone,” Dimon wrote.
Along those lines, Dimon wrote in 2016 that nonbanks rose from 20% of the FHA 30-year mortgage originations in 2011 to 80% in 2016.
And that figure has only gone up in recent years.
According to Montgomery, banks currently make up less than 14% of FHA loans. In fact, Montgomery said that during 2019, only one of FHA’s top 10 lenders was a depository institution.
But that could change, as Montgomery said Monday that several banks have committed to returning to FHA lending as a result of the HUD-DOJ decision on the False Claims Act.
“We think the False Claims Act announcement is big news,” Montgomery said. “Many believe the statute was used unfairly to extract $7 billion in settlements, and the (agreement between HUD and DOJ) is a significant one.”
Montgomery did not reveal which banks are the ones that have committed to return to FHA lending, but given Dimon’s previous proclamations about FHA lending, it wouldn’t be a surprise to see Chase return to FHA lending.
“The mortgage industry has long shared HUD’s objective of improving the FHA program and expanding access to credit,” a Chase Home Lending spokesperson said in a statement to HousingWire. “We are pleased to see their announcement, which provides a level of clarity and certainty that will make it safer for banks to participate in the FHA program.”
By: Ben Lane