The federal government hopes to convince banks to make more mortgage loans to risky borrowers after several costly disputes over a federal loan program led some to determine it wasn’t worth the trouble.
Lawsuits brought by the Justice Department over loans backed by the Federal Housing Administration are at the core of the issue. While FHA lending has grown quickly in 2015, legal action is mounting over too many alleged documentation errors by banks underwriting the loans. That’s led to billions of dollars in penalties against banks.
Some lenders, concerned about lawsuits, have adopted stronger credit requirements such as higher credit scores than the FHA threshold and are thus making fewer loans through the FHA program.
The FHA on Tuesday tried to ease tensions by proposing new documents for certifying loans. But many lenders are not optimistic about the new certification requirements.
The proposed certification process misses the mark of what Wells Fargo & Co. had sought, for example. The country’s largest mortgage originator and second-largest FHA lender announced it would pull back from the program as a result, according to The Wall Street Journal. Last year, the bank dialed back some restrictions it had placed on FHA loans, but now plans to put them back.Edward Golding, principal deputy assistant secretary at the FHA, said the new certification approach leaves room for small errors while still allowing the government to pursue damages in cases of more significant mistakes. “In the end, we believe our efforts to expand access to credit for responsible borrowers are making a difference,” he said on a conference call.
The FHA insures lenders against default when they extend mortgages to qualified buyers with credit scores of as low as 580 and down payments as low as 3.5%.
Lenders reportedly made $113 billion in FHA mortgages in the first half of 2015, up 66% from the same period a year earlier and enough to account for nearly one-seventh of all first-lien mortgages. At the same time, the data show only half of the top FHA lenders in 2013 were still in the top 10 in the first half of this year, as banks hit with penalties have backed away.