The JPMorgan Chase & Co. (JPM) chief executive officer, whose bank recently paid more than $600 million in federal fines for originating $200 million in flawed FHA loans, wants clearer rules spelling out when the government will demand these triple penalties. Without that, Dimon suggested on an earnings call last week, he might stop originating FHA mortgages altogether.
“The real question to me is, should we be in the FHA business at all?” Dimon said. “And we’re still struggling with that.”
Dimon’s threat to stop FHA lending may be meant to push regulators to address bankers’ frustrations over the stiff penalties they must pay, housing industry analysts say. Banks are under pressure to provide FHA mortgages -- despite the risk of damages for underwriting errors -- to help meet federal laws requiring them to serve minority and low-income borrowers. The standoff is hurting the tepid housing recovery as lenders tighten standards for FHA loans to avoid triggering the fines.
“My guess is that it’s probably gotten people’s attention that he signaled that maybe he’s had enough,” said Brian Montgomery, vice chairman of the Collingwood Group in Washington, who served as FHA commissioner under President George W. Bush. “I suspect that every one of his competitors feels the same.”
Jason Lobo, a JPMorgan spokesman, declined to comment on whether Dimon’s threat to leave the FHA program is a tactic to pressure regulators.
Many of the mortgages originated during the housing bubble were deeply flawed as lenders approved loans with missing or falsified documents showing borrowers had the income and other qualifications to repay the money. The Department of Justice has been punishing banks that submitted such mortgages for government insurance, which led to losses that forced the FHA to take a $1.7 billion taxpayer bailout -- the first in its 80-year history.
Bankers complain that the DOJ is using a federal fraud statute to exact triple damages for both the worst breaches of quality control and for loans with tiny inadvertent mistakes, said David H. Stevens, president of the Mortgage Bankers Association.
“There are egregious violations and there are minor technical foot faults, and both of those can cause a triple-damage claim by the DOJ,” said Stevens, who served as FHA commissioner from 2009 to 2011 during the administration of President Barack Obama. “Without getting that balance back into play, we’re going to be continuing to face an overly tight credit market.”
Betsy Feuerstein, a spokeswoman for the U.S. Attorney’s Office for the Southern District of New York, declined to comment.
Montgomery, whose company consults with lenders on regulatory issues, said he estimates that banks so far have settled about $4 billion in claims with the federal government over FHA and other government-insured loans from the housing-bubble era.
Cameron French, a spokesman for HUD, declined to comment on Dimon’s remarks. The agency is working on revising its guidelines and in June requested public feedback on some suggested changes, he said.
“There should be a commercial resolution of this dispute, where you don’t have triple damages if something goes wrong,” Dimon said on last week’s call. Dimon said that he wants the FHA to come up with “some real bright lines and that make it easy for us to try to do what the government wants us to do.”
The federal government created the FHA, an arm of the Department of Housing and Urban Development, to help entry-level borrowers buy homes. The Depression-era agency now backs about $1.1 trillion worth of U.S. mortgages.
With the evaporation of subprime lending, the FHA has played an expanding role in providing home loans to minority borrowers and in inner-city neighborhoods. Of the blacks and Hispanics who borrowed to buy a home in fiscal-year 2013, 54 percent used FHA.
The agency’s central role in providing credit to underserved borrowers should compel HUD’s incoming secretary, Julian Castro, to work on new guidelines specifying that minor errors in loan files don’t constitute fraud worthy of major penalties, said MBA’s Stevens.
The dispute is similar to one between banks and the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac. With lenders complaining that the two mortgage-finance companies were forcing them to absorb losses on too many defaulted loans, FHFA director Melvin L. Watt in May announced changes designed to reassure lenders that they wouldn’t be surprised by claims for repayment.
JPMorgan, the second-largest securitizer of FHA loans, is already scaling back its FHA lending and its purchases of the mortgages for securities, according to data from Inside Mortgage Finance. In the first quarter of 2014, the bank securitized $4.3 billion in mortgages through Ginnie Mae, the government-owned corporation that guarantees bonds backed by FHA and VA loans, IMF said. That volume, reflecting loans the bank both bought and originated, is down 64 percent from a year ago, compared with an overall drop in Ginnie Mae securitizations of 41 percent.
JPMorgan’s conflict with FHA largely stems from loans it originated or bought and securitized during the housing boom. In February, JPMorgan agreed to pay $614 million to settle claims it improperly approved FHA and Veterans Affairs loans that weren’t eligible for insurance from those agencies because they didn’t meet underwriting requirements.
The bank, which also agreed to improve its quality control program for future FHA loans, acknowledged it failed to inform the agencies when its own internal reviews discovered more than 500 defective loans that shouldn’t have been submitted for FHA and VA insurance, the Justice Department said in a statement.
That wasn’t fraud, Dimon said. “In my opinion, it was a commercial dispute,” he said.
JPMorgan may find it difficult to get out of FHA lending completely because the bank must make loans in all of the neighborhoods it serves under the Community Reinvestment Act, said Guy Cecala, publisher of IMF. Banks also must lend to borrowers of all races under the Equal Credit Opportunity Act.
“It’s not going to be easy to say we only want to lend in more affluent areas to higher-income borrowers even if those loans represent less risk,” Cecala said. “Let’s face it. FHA is one of the safest ways to make loans to lower-income and minority borrowers because it’s a government program that has government guarantees.”
Municipal and federal authorities are intensifying pressure on banks to lend equally to borrowers of all racial backgrounds. Providence, Rhode Island sued Santander Bank NA (SAN) in May, alleging the bank violated federal law because its loans to minorities decreased at the same time as its lending to whites increased.
“We categorically reject this accusation and will vigorously defend ourselves against the legal action,” Banco Santander said in a statement after the case was filed in federal court.
JPMorgan is under investigation by the U.S. Attorney’s office in New York and two different municipalities for potential violations of the Fair Housing Act and the Equal Housing Opportunity Act, the bank disclosed in its first-quarter earnings filing with the Securities and Exchange Commission. The bank said it is cooperating with these investigations.
Shifting away from FHA mortgages may be worth the extra scrutiny on fair-lending and CRA issues, Dimon said on last week’s call, suggesting that the bank could make portfolio loans that would meet fair-lending requirements.
“Yes, if you don’t do any FHA, that hurts you a little bit,” he said. “But to do FHA and lose billions of dollars, that’s a whole different level of shareholder irresponsibility.”
John Taylor, president of the National Community Reinvestment Coalition, said JPMorgan would have to relax its credit standards for portfolio lending to reach the same diverse group of borrowers it now can reach with FHA.
“FHA accepts 3 percent down,” Taylor said. “Is Chase going to do 3 percent down? If he decides I’m not going to do FHA, does that mean his portfolio credit criteria are going to expand? The devil is in the details.”
Dimon, whose bank benefited from government-brokered takeovers of Bear Stearns Cos. and the banking assets of Washington Mutual Inc., has criticized regulators before. In a 2012 conference call, he said there was “no one really in charge” of U.S. and industry efforts at reforming the housing market and that a more holistic approach would’ve resulted in a speedier recovery.
“I wouldn’t underestimate the deep concerns that Jamie is articulating, because I think they are shared by executives across the industry,” Stevens said. “This clarity is needed to create the confidence to lend to the full extent of the FHA program, to keep this housing market on track, and most importantly, to keep access to credit on track.”