FHA Working to Mitigate Lender Litigation Fears
The Federal Housing Administration single-family loan program has not lost market share even though one of its largest lenders has reduced its originations.
Although JPMorgan Chase has reduced its FHA lending, the agency's share of the mortgage market is holding steady, a Department of Housing and Urban Development official said this week.
There has been a "shift" and that "business has been picked by other lenders," the HUD official, who spoke on condition of anonymity, told reporters on Wednesday.
Major FHA lenders such as JPMorgan have come under scrutiny by the Department of Justice and the HUD inspector general for allegedly faulty underwriting of legacy FHA loans. JPMorgan paid $614 million to settle the dispute.
But Jamie Dimon, the bank’s chairman and chief executive, said earlier this month that FHA has become a risky business, suggesting it may exit the space.
"Until they come up with a safe harbor or something, we are going to be very, very cautious in that line of business," Dimon said during a conference call with investors and bank analysts.
The HUD IG also recently informed BB&T Corp. that the Winston-Salem, N.C.-based bank will be audited soon for its compliance with FHA origination requirements. In response to the notice, BB&T said it would establish a $53 million reserve for a potential settlement.
"While there are no findings from HUD at this time, in light of announcements made by other financial institutions related to the outcomes of similar audits and related matters, and after further review of our exposure, we believe it is prudent to establish reserves," said BB&T chairman and chief executive Kelly King.
At Wednesday's briefing, the HUD official noted that FHA cannot shield lenders from HUD IG audits and Justice Department litigation. In addition, FHA must hold institutions accountable for lending violations.
However, FHA is trying to provide lenders with clearer guidance on its underwriting standards. The agency's system currently has 98 defect codes and it identifies so many problems that it is "hard to add them all up and determine what is really wrong," the official said. FHA is working on reducing the number of defect codes and provide clearer definitions.
The agency is also revamping its loan quality review program to conduct early reviews of newly originated loans. This will allow FHA to spot defects upfront so lenders can take corrective actions and avoid repetitive errors.
HUD hopes expanded loan sampling and timely notice of underwriting defects will give lenders more confidence in originating FHA-insured single-family loans. It may also reduce the fear that lenders could get hit two, five, or 10 years down the road for costly mistakes.
"We understand most lenders are frustrated by this ongoing litigation risk," the HUD official said. However, FHA is trying to mitigate those risks by clearly defining the rules so lenders can "turn the page and focus on the future."
Yet lenders appear to be apprehensive about this new loan review process.
HUD's goal is "admirable," according to Brian Chappelle, the co-founder of Potomac Partners. "But I have real concerns about the ability of FHA to implement a process that does not quickly deteriorate into a hyper-technical game of 'gotcha' where penalties are proposed for minor underwriting or document errors."
HUD officials revealed during the briefing that one of FHA's initiatives to get lenders to serve borrowers with lower credit scores has hit an unexpected snag.
FHA wants to tweak its automated underwriting system so that all borrower applications with credit scores below 620 and debt-to-income ratios above 43% are referred for manual underwriting.
Agency officials were hoping its new manual underwriting guidelines would expand the spectrum of FHA borrowers.
While some lenders have used manual underwriting, they ran into difficulty selling the loans to aggregators and securitizing the loans through Ginnie Mae.
"That is something we are investigating," the HUD official said.
The official also told reporters that FHA will continue to conduct its quarterly auctions of nonperforming loans. "It has improved FHA recovery rates on nonperforming loans."
On June 11, FHA sold 22,550 defaulted loans with an unpaid principal balance of $3.9 billion. The winning bidder paid $2.6 billion or 65.8% of the unpaid principal balance.
Lone Star Funds submitted the highest bid on each of the 16 loan pools. It paid $2.6 billion or 65.8% of the unpaid principal balance and walked with all the loans—leaving 26 other bidders in the dust.
It was the "most competitive sale to date," the HUD official said.