Philip J LaTessa, Syracuse NY The Funding Source, Syracuse NY Is it worth doing FHA Loans anymore? Jamie Dimon, CEO of JP Morgan stated “The real question to me is, should we be in the FHA business at all?” during a conference call in July. That is the question many lenders are asking themselves. And, it appears; HUD is seeing a drop in FHA loan originations across the board. Loans to borrowers with lower credit scores dropped by almost 20% compared with one-year ago in July 2013. This is not good news for borrowers seeking to enter the housing market. It certainly is a restriction of credit that, on another day, would have been extended to those same borrowers. FHA states that their minimum credit score is 580, however most lenders are reporting going no lower than 680. Some mortgage bankers are at 640. Very few are at the old norm of 620 or 600. There are many competing reasons for this. For starters, all lenders are watching their HUD Early Warning page on FHA Connection to make sure their Early Payment Defaults are as low as possible without harming volume and profit. FHA was very clear in 2010 that should any lender go above a certain threshold they would be swiftly exited from the FHA business. Other lenders, regulatory agencies, warehouse lenders, investors who buy loans all look at the EPD of a lender to gauge if they want to continue to do business. Credit scores play a big role in this. And, that’s why so many bankers stay at 640 while major banks stay at 680. Then there’s the push back against the regulatory civil and criminal cases that burst through the dam between 2012 and 2014 against lenders by numerous states and the federal government. Lawsuits have ranged from being based on fraud to the False Claims Act to – as in the case of Countrywide – just sloppy and fast underwriting that did not take into account basic underwriting. Lenders have been threatened with regulatory sanctions, fines and public whipping by over zealous regulators who are convinced that mortgage lending is a cesspool of fraud. And, the fines have risen. In 2013 Bloomberg estimated US banks legal bills exceeded 100 billion dollars. In 2014 Forbes estimated that banks have paid out 251 billion to the government. While there was fraud by lenders, there certainly was fraud by borrowers. And, for the most part, with the tightening of the regulations those who were in the business for a
quick buck have exited. Those remaining are paying financially and with their reputations. Each time a fine is announced a major political figure releases a flowery press release wagging their fingers at the lenders. Meanwhile, the CPFB and new RESPA laws have made any simple mistake a very large one. Lenders are acutely aware that they must lend to everyone without discriminating, they need to disclose and prove they disclosed in a 3-day period, they can not have rates and points exceed certain thresholds over the previous week’s average rate (regardless of what the market is doing) and they can’t exceed certain percentage level in fee and rate on a loan. If one thing goes wrong, they can be sued. And, under the Deutsche Bank in 2011, banks and lenders realized they could face triple fines. And, let’s not forget the “ability to repay” provision. Based on the recent onslaught of lawsuits, who can’t foresee a savvy borrower claiming that the lender miscalculated their income and they were 2% over the maximum DTI, therefore their loan is not a QM loan. What are then the consequences for the lender? Or, as is typical, what about that borrower who’s income calculation can be done two or three different ways to come in a tad different each way for a monthly gross? What if the borrower is on the max DTI threshold and some regulator determines that the borrower was actually over the max DTI and therefore the loan was not a QM? What then? It almost seems as if the government is raiding the bank accounts of the banks in order to continue the federal and state spending. For each time a settlement is announced one never hears of the money going to the victims. It typically ends up lost in some account that is swept into the government general fund and used otherwise. In the eyes of lady justice, it seems the balance between risk and reward is off kilter. Any lender can be accused of breaking a myriad of regulations and rules and face fines that can, without a doubt, wipe out years of earnings. And, potentially, expose directors and officers to criminal actions. The FDIC recently lost a lawsuit against the former executives of North Carolina Community Bank. The FDIC, in an attempt to take the assets of the former executives of a Community Bank in NC that had failed argued that the executives did not lend in good faith and caused the bank to fail. The Judge in the case actually cited the FDIC by stating the evidence proved the bank and executives followed due diligence and if one was to buy into the FDIC argument, then the FDIC expects the executives to have had better knowledge of the economic calamity about to hit when luminaries as Ben Bernake stated there was no way anyone could have expected the crisis to occur. So, lenders see the government as simply suing in order to beef up their coffers and offer, perhaps, red meat to the average citizen who blamed the economic crisis on the backs of banks and mortgage lenders.
In this political environment, why would a lender put themselves at risk of being blamed for something 5 years from now that they had no way to know would occur when making a business decision today? Banks don’t want to be targeted for clerical errors or to be the whipping boys for a crisis that was caused by exuberance across the board. Even the New York Times reveled in 2005 how low income buyers were able to buy into the American dream and become financially stable as if it were a good thing. By 2008 they were stating quite the opposite. It’s tough to be the subject of someone doing a Monday Morning Quarterback moment when they never once played football. And that brings us back to doing FHA loans. Because of the aggressive tactics, lenders simply have pulled back from doing HUD based loans. Credit has tightened. So, lenders like Wells Fargo have pulled back – as in 82% less FHA lending in 2014 as compared to 2013 according to Bloomberg. That’s a normal response to having faced regulators stating a lender broke a rule and to pay large fines. It’s almost as if the government wants to have their cake and eat it too. Lending to low to moderate borrowers is critical to the economy and critical to government so that there is economic mobility. Think if we lived in a society where people knew they had no opportunity to move anywhere from their current socio-economic standing. The government would be seriously threatened. So, their interest is to provide opportunity and FHA lending makes perfect sense to provide this. However, the regulators and politicians have gone too far in their hubris and press releases lauding their investigations and pointing out small warts of lenders who, in many cases, did not harm any consumer. The days of subprime lending, neg amort loans and 120% LTV loans are over – which is stemming the tide of any future under water homes while current ones are recovering to pre-recession pricing levels bringing them back to par for the most part. So, we’ve reached the abyss. The government has formed their joint mortgage fraud task force and is going after large and small lenders with threats looking to shut down lenders, publicly cite lenders, fine some and criminally indict others. Those actions certainly play to main street and fills the kings coffers. But, now the government is surprised that lenders no longer want to engage in anything that would put them in the same position going forward. That falls under the “insanity is defined as doing the same thing over and over again and expecting a different result” So, what will it take? The safe harbor offered by HUD under the QM rule does not feel so safe the to the average reader as it is clear that while there is a safe harbor, you’re still in (hot) harbor water if accused of violating QM rules by a borrower. That did not make me, as an owner, feel very comfortable. Bankers typically have a one-year agreement with investors. Your borrower stays compliant for one-year, there’s no recourse for buy backs (which is another hot topic). So, why does HUD not offer large lenders a three or five year no recourse contract?
How can a JP Morgan tell if Jane and Joe, two long term teachers with tenure, don’t’ get into a car accident in year 6 and default on their mortgage by year 7? Is that then cause to sue JP Morgan for egregious underwriting, loose standards or sending the FDIC after Jamie Morgan? I don’t think HUD Secretary Castro – who admittedly had to ask Congress for almost 2 billion dollars in 2013 – would want his decisions at HUD, made on the best available information to him today in 2014 that he honestly believes is in the best interest of HUD and the FHA lending system to just not work out in 2020 and have some regulatory agency strip him of his home, bank accounts and paste his picture and name on the front page of the paper with serious egregious allegations – when all he was doing was his honest best. There has to be a better way