JPMorgan Leads Big Banks Out the Door of FHA

JPMorgan Chase has nearly stopped making home loans insured by the Federal Housing Administration.

Most large banks have curtailed FHA-backed loans in the past two years because of concerns about credit and legal risks, and JPMorgan's 98% drop-off in that period puts an exclamation mark on the trend.

The $1.8 trillion-asset bank's FHA market share was a mere 0.2% at June 30, compared with 12.2% just two years earlier, according to government data crunched by the American Enterprise Institute's International Center on Housing Risk.

The rollback among big banks follows harsh penalties meted out by the Justice Department , which accused many banks of putting FHA on the hook for shoddy loans in the years leading up to the mortgage meltdown. Market shares at BB&T, Bank of America, Fifth Third Bancorp, Flagstar Bank, M&T Bank, Regions Financial and Wells Fargo have all declined in the past two years, the data shows.

Nonbanks have stepped into the void, and that shift is not expected to reverse until bank executives feel more comfortable with the credit profiles of many FHA borrowers and determine the odds of further federal prosecutions have fallen.

"The banks have ceded this share voluntarily," said Ed Pinto, co-director of the AEI center, and a former chief credit officer at Fannie Mae.

Nowhere is that reality clearer than at JPMorgan Chase.

Chairman and Chief Executive Jamie Dimon warned last year that the risks of FHA lending were just too great.

"The real question for me is should we be in the FHA business at all," Dimon said on a conference call with analysts in July 2014. "Until they come up with a safe harbor or something, we are going to be very, very cautious in that line of business."

He meant it.

In the second quarter, JPMorgan Chase originated just 340 FHA loans, compared with 19,111 FHA loans in the second quarter of 2013. Meanwhile, the bank's overall home lending business is booming. JPMorgan originated $29.3 billion of home loans in the second quarter, up 74% from a year earlier.

Figures were not yet available for the full third quarter, but JPMorgan originated 97 FHA loans in July and August, according to the center's data.

JPMorgan is trying to reduce the risks of lending to borrowers with low credit scores and potentially greater chance that the loans will go bad.

Amy Bonitatibus, a spokeswoman for JPMorgan, said the company has significantly reduced FHA lending over the last year due to "the litigation risks, high costs to service and high delinquency rates."

"We offer products that meet the needs for people across the credit spectrum with a focus on sustainable homeownership," she said. "This is part of our ongoing strategy to simplify our mortgage business and focus on high quality originations."

FHA lending is a particularly thorny issue not just because of the high penalties for mistakes on FHA-insured loans. Any pullback in lending to FHA borrowers with lower credit scores invokes concerns that credit could be restricted to minority groups.

Earlier this month, Wells Fargo, the largest U.S. home lender, tightened credit score requirements on FHA loans. Wells raised minimum credit scores to 640 in its retail channel, up from 600. Wells did so after the FHA recently proposed to keep its current policy on loan-level certification when many in the industry were hoping for changes.

Banks maintain that the FHA's proposal did not go far enough in limiting the government's use of the False Claims Act, a Civil War-era law that allows the Justice Department to collect triple damages if a bank has violated the FHA's underwriting standards.

The proposal requires that lenders perform a so-called "pre-endorsement review" of all FHA home loans and certify that each loan submitted for FHA insurance contains no defects. Mortgage lenders have long tried to limit their liability only to material defects on FHA-insured loans. But as the proposal now stands, inaccuracies, inconsistencies or even minor mistakes can still result in substantial fines and penalties.

"The view of lenders is that the proposal leaves in place the current standard of strict liability, so that any mistake whatsoever can trigger a False Claims Act liability," said Jim Parrott, a senior fellow at the Urban Institute and owner of Falling Creek Advisors, a consulting firm in Chapel Hill, N.C.

Parrott, a former senior advisor to the National Economic Council, said banks like Wells are saying that "we can't take the risk anymore and we're pulling back."

B of A, Citigroup, JPMorgan and U.S. Bancorp have all settled claims that they improperly approved FHA-insured loans that did not meet the agency's underwriting standards.

But plenty of others, including Wells Fargo, Quicken Loans, PNC Financial Services Group, Regions and BB&T still have outstanding investigations of FHA loans, according to company filings.

Wells Fargo's FHA market share has fallen by more than half in the past two years. Wells' share fell to 15% in the second quarter, from 32.4% in the same period in 2013. U.S. Bancorp was one of the few banks to see an increase in its FHA market share during the two-year period ended June 30, to 8.2% from 7.9% two years ago; however, its number of FHA loans and market share fluctuated considerably during that time period.

Both B of A and Citi group have less than 1% FHA market share, though they had not been big players before.

Overall, large banks' share of FHA-insured purchase-only home loans has dropped sharply since February. Large banks originated 23.5% of FHA loans in August, down from 29.6% in February and 65.4% in November 2012, when AEI first began tracking the data.

However, nonbank rivals have stepped into the void.

Nonbanks' share jumped to 68% in August, up from 62.2% in February and 26.8% in November 2012, virtually replacing the share ceded by large banks.

Meanwhile, credit quality has improved. FHA's serious delinquency rate fell to 2.91% in the second quarter, from 3.5% a year earlier, according to the Mortgage Bankers Association.

What could reinvigorate banks' interest in FHA loans? Perhaps the answer is greater legal clarity or rewards for demonstrating prudent lending.

"The FHA should create policy where lenders have an incentive to control for their False Claims Act liability through better underwriting, not less lending," Parrott said.

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Comments (8)
If your slams are aimed at me I'm not feeling any "bruises".I STARTED in this business and was trained at a BIG bank 40 ys ago when they actually had integrity.I didn't leave banking until they had started the antics of buying up smaller banks left and right and creating mortgage companies to handle their mortgage business.After being "transferred" into my bank's off shoot company I quickly began to see how things were being handled.After they hired a crew of NEW "loan officers" who had been employed in used car sales...AND "decided" they would simply "train" them on site..themselves...it was VERY clear that the standards I had become used to were no longer in force.Becoming a mortgage broker didn't change MY behavior but it DID allow me to maintain MY level of service where it belonged.I didn't DO "every" loan..just because the products had been created to shove loans through with NO minimum standards...and I didn't make anything CLOSE to the kind of money others with NO standards WERE making.NOTHING was going to convince me that doing something WRONG or in many cases flat out illegal WAS worth putting my name on.Your fallaceous ideas of WHAT these banks are taking in is mind boggling and it DOES enforce that what is left in banks has neither the skill nor the expertise that is needed...it is still stocked with the ignorant shills that THINK making big money is worth the lies they're being told..and that THEY are "telling".
Posted by Bwestbroker | Friday, October 02 2015 at 11:10PM ET
The numbnuts above has no idea what he/she is talking about! The Big 4 Banks each take $100 billion in annual revenue, and $30 billion in annual profits. That's a meager 30% profit margin, of which they pay 9% in income taxes. And that's what they report. Imagine what those figures look like before Arthur Anderson / Accenture moves the money off sheet, and offshore. The truth is the big banks borrow money from the public and the US government at .75%, and then lend that same money back to the public at 12
Posted by GetSteveB.com | Friday, October 02 2015 at 10:42PM ET
Note the negative comments about the big banks coming from a mortgage broker who truly has no "skin in the game" on making bad loans with a high rate of default. The statement that the big banks are solely responsible for the melt down and made huge profits is laughable. Again this statement came from a broker I am sure that originated all the shoddy subprime loans (making huge profits), sold them to the banks (with fraud all in it)and then "headed for the hills" when the banks had to suffer massive losses to clean it all up.
Posted by MortgageBanker | Friday, October 02 2015 at 5:36PM ET
Those of you EXCUSING the Banks are way off base.Before this last fiasco in banking there was a day when doing a loan for a customer...ANY kind of loan..meant you or any other loan officer would remain in touch with the client.If there WAS a missed payment..the person who had helped them get their mortgage or any other loan officer WOULD contact that borrower and offer help IMMEDIATELY.We didn't wait for a loan to be foreclosed and sold to get our butts into gear.These days the training and follow through has become inordinately shoddy with loan people.But them locally...we were "blessed" with used car salesmen as "loan officers" so the QUALITY of bank response disappeared despite the increased ability by virtue of computer programs to maintain very close tabs on your clients.Big banks have failed at everything EXCEPT lining their own pockets.This "fear" some of you THINK they have isn't based on loans as they SHOULD be done..it is based on not hiring and TRAINING the right people to do these jobs in the first place.
Posted by Bwestbroker | Tuesday, September 29 2015 at 8:52PM ET
You can't blame the lenders. Their overlays are in place because of the number of defaults in particular areas and making them at risk of losing their FHA authority. So rather than stop making FHA loans, they add overlays. The bad part about it all is, the loan can be approved through AU and meet all of FHA's guidelines yet if have a high default, you can lose your license. If you don't make the loans, then some will consider it discrimination. Not quite fair, is it? Loan are created and adjusted to meet the underserved which usually results in a higher loss. Countrywide was commended for making loans to the underserved, etc and well, everyone knows what happened there. Even if you meet all the guidelines, the lender is responsible for defaulted loans
Posted by mtgbff | Tuesday, September 29 2015 at 11:25AM ET
If I were the owner of Wells, BOA, Chase, or any other bank I wouldn't do FHA loans either. This is not the "good old days" anymore where the worst that would happen is a loan swap or buy back. Because this is still such a new area and no one is sure of the exact consequences.......I'd tread lightly too. No brainer.
Posted by NYYANKEE | Tuesday, September 29 2015 at 11:24AM ET
Once again the Big Banks stop lending, when consumers need them the most. The large banks caused the economic meltdown by taking huge risks, and making huge profits! Once the profits diminished, the mega banks headed for the hills. Now Chase, BofA and Wells Fargo have stopped lending to FHA borrowers, who are typically 1st time home buyers and moderate income families. And the reason the big three are not providing FHA loans, is because the government is finally holding them accountable for the frauds they committed that caused, "The Great Recession." Note these same Big Banks are currently promoting their Jumbo home loans to their wealthier clientele. It's apparent that the middle class should stop supporting the big banks, and start supporting smaller, mid sized banks that provide, FHA, VA and Conventional mortgage loans. My suggestion is www.getsteveb.com ~ Steve Bernstein ~ Mortgage Consultant Nationwide ~ NMLS 1230169
Posted by GetSteveB.com | Monday, September 28 2015 at 11:43PM ET
My BIGGEST problem with FHA loans done through some of those banks has been with them putting their own lending criteria into place..for instance..the demand for HIGH credit score even when we had a buyer who had NO score and NO bad accounts
.....just paid cash for everything .Also their "requirement" that the buyer have 5 accounts reporting to the credit bureau.If a family has only 1 credit card AND has NO collection accounts reporting to the bureaus...THAT should be regarded as a good buyer.When FHA was done the way it was designed to BE done..there were fewer problems with it.Once the BANKS began to meddle with the set up..THEN we had problems.Frankly..if they are kept OUT of FHA lending...works for me.
Posted by Bwestbroker | Monday, September 28 2015 at 7:39PM ET
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