The FHA is facing a mutiny. Despite terrific results in fiscal 2015, some of the largest lenders in the country have had it with the nation’s per-eminent mortgage insurance program. They’re offering borrowers alternative loan options and setting up the mortgage industry for a clash of financial titans.
The FHA program is a big deal because it allows purchasers to buy with just 3.5 percent down. In 2015 more than one-fifth of all purchase money mortgages were insured through the FHA.
The nation’s largest lenders have traditionally been major players in the FHA market, but those days are quickly becoming old news. To see what’s going on compare 2009 with what we have so far in 2015. Data from RealtyTrac shows how times are changing.
In 2009, the five largest originators of FHA-backed purchase-money mortgages were Wells Fargo Bank, Bank of America, MetLife Home Loans, Countrywide, and JP Morgan Chase. Between them they originated just over 20 percent of such loans.
Now let’s swing forward to 2015. So far the five largest originators for the year are Quicken Loans, Caliber Home Loans, Academy Mortgage, Guild Mortgage and Sterns Lending. Together, they represented 9.82 percent of all FHA purchase-money originations.
The FHA’s leading originators in 2015 are all non-banks, they do not take deposits or offer checking, evidence that the financial marketplace is increasingly populated with new players and new ways of doing business. According to the Los Angeles Times, non-banks “now control 64 percent of the market for FHA and similar Veterans Affairs loans, compared with 18 percent in 2010.”
We could look at the rise of non-banks and say FHA lending has been “democratized” and that borrowers have more choices, or we could be realistic and acknowledge that large banks which could be making FHA loans are fleeing the program.
What’s behind the big bank movement away from FHA mortgages?
When lenders obtain FHA insurance they provide representations and warranties guaranteeing that each and every mortgage covered under the program meets FHA standards, things such as a certain credit standing, a given loan-to-value ratio, and a maximum loan size. In turn, if the FHA later finds that the loans do not meet program standards it can force the lender to buy back the loan. The catch is that some loans fall into a murky realm where the mortgages are current, payments are being made and yet there might be small paperwork glitch. Should lenders have to buy back such financing?
Speaking at the National Press Club in 2014, Wells Fargo CEO John Stumpf said his bank had faced buy-back demands for loans which were outstanding for a decade. He said buy-backs were often for minor matters; a loan document which had “John G. Stumpf” on the first page and “John Gerard Stumpf” on the second might be regarded as a “technical default” and sent back to a lender.
“The real question to me (is) should we be in the FHA business at all and we’re still struggling with that,” said JPMorgan Chase chairman and CEO Jamie Dimon in the summer of 2014.
Now — again — we have another big lender on the verge of leaving the FHA program.
Quicken Loans said in April that it was “the nation’s largest FHA lender and has originated the government agency’s best performing loan portfolio.”
Nevertheless, it was suing the government over FHA buy-back demands, claiming that “the company was left with no alternative but to take this action after the DOJ demanded Quicken Loans make public admissions that were blatantly false, as well as pay an inexplicable penalty or face legal action.”
“After three years of struggling to understand the DOJ’s position and methodology that would warrant the country’s largest and highest quality FHA lender to make untrue admissions and pay an inexplicable penalty or face public legal action, it is time to ask the court to intervene,” said Quicken Loans CEO Bill Emerson. “No threat, including high-profile senseless lawsuits from powerful federal officials, will deter our company and its leadership from doing the right thing. We will stand in defense of our impeccable reputation established by thousands of hard-working ethical team members over our 30-year history.”
Everyone agrees that if the lender did a lousy underwriting job or fudged the paperwork that the FHA has every right to send the loan back, especially if the borrower is not making full or timely payments. But matters of principle murky when we talk about borrowers have been making their payments year after year even though their paperwork has a minor glitch.
Will the FHA suffer if the nation’s biggest lenders pull away from the program?
The answer is not clear-cut.
Originating FHA loans will not be a problem. In fiscal 2015 the FHA reported huge gains. Endorsements rose by 329,877 loans, a massive increase. Reserves grew by $19 billion and are now above the congressionally-mandated 2 percent capital ratio. What was the engine behind such growth? A reduction of the annual mortgage interest premium in January 2015 by .5 percent coupled with the ability to buy with just 3.5 percent down. Borrowers want their FHA mortgages.
If big lenders in 2016 and beyond do not want to originate FHA-backed loans there are plenty of smaller lenders that will gleefully step into the breach. The public will be served.
The catch is this: What happens if the FHA continues to carp and fuss over minor paperwork glitches and demands buy-backs from smaller lenders? Will they simply follow the big lenders and dump the FHA program? At what point do enough lenders leave the program and limit the ability of borrower’s to get FHA-backed loans?
None of these are good questions for the FHA. Lenders are not grousing about Fannie Mae and Freddie Mac, in part because a year ago the two big GSEs adopted “relief” rules for lenders designed to end petty disputes. If a borrower has been making payments for a given period, say three to five years, then the loan is performing so small and immaterial document glitches can be cleaned up or ignored without ugly legal battles.
The current arguments between big lenders and the FHA are unnecessary. Everyone ought to sit down in a room, have a few beers, and get this dispute settled. It really shouldn’t be much harder than that, especially given the example set by Fannie Mae and Freddie Mac.