NEW YORK (Reuters) - Quicken Loans, the third biggest mortgage lender in the U.S., is considering backing away from a government program that provided critical support to the housing market during the financial crisis, the latest in an exodus of big lenders from the program.
The departure of the biggest lenders from the U.S. Federal Housing Administration program, which helps first-time homebuyers, could translate into big losses for taxpayers during the next housing downturn, analysts said. Officials at the FHA said they are not alarmed by that risk.
Quicken along with JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co - all of the top four mortgage lenders in the United States – are tussling with the FHA over how the agency deals with loans that sour.
The three major banks, not satisfied with the way the FHA resolved their complaints, have scaled back their lending through the program. Now Quicken, the largest FHA lender, is looking at bowing out as well, company founder and Chairman Dan Gilbert told Reuters. It is also considering cutting the risk it takes in the program, he said.
Quicken accounted for almost 6 percent of the FHA’s loan volume in the first half of 2015, or about $6 billion of loans, according to trade publication Inside Mortgage Finance.
The FHA is arguing with lenders over when it is entitled to back out of the insurance that its program provides. When a borrower gets an FHA loan, the agency essentially guarantees the mortgage against default, and promises to pay the lender if the homeowner reneges on his or her obligations.
Unlike most other government home-loan programs, borrowers who get FHA loans can make a down payment equal to as little as 3.5 percent of the home purchase price, which makes the mortgages appealing to first-time buyers who may struggle to pull together big upfront payments. Because borrowers are paying for mortgage insurance, they pay higher interest rates on their loans.
The FHA pays out on all default claims almost immediately, and only reviews them later to make sure it got complete and accurate information about borrowers when it first guaranteed the mortgages. If it finds that it did not, it will demand that the lender reimburse it for the insurance payout, the way a life insurer might sue to recover funds paid out on a policy purchased by a smoker who failed to disclose his habit on his application and died of lung cancer.
Lenders including Quicken say the FHA demands repayments for even the most minor of mistakes that a bank may make when extending a loan, to force them to bear the agency’s losses, making the government’s insurance an illusion.
When Wells Fargo and Bank of America balked at the FHA’s strict interpretation of the rules, the Department of Justice sued them. The government has settled with Bank of America and JPMorgan Chase over their FHA obligations, but not with Wells Fargo or Quicken.
Quicken, feeling like it was being strong-armed into settling, sued the Department of Justice April 17 before the government sued it six days later. Current fights over the FHA could have a big effect over how the agency weathers the next housing crisis. The smaller lenders that now make up most of the FHA’s client base may struggle to stay solvent whenever the next housing downturn comes, meaning when the agency tries to push loans back to them, they may not have the resources to repay the government.
About 80 percent of the loans in the FHA program are made by lenders who are not banks, most of which are relatively small. That figure compares with about 50 percent at the height of the crisis.
“It could potentially be an issue in the next downturn,” said Tom Lawler, an economist who warned of an impending housing bubble in 2006 when he worked at Fannie Mae. But with mortgage credit quality improving now, “you shouldn’t lose sleep over it today,” he said.
During the last crisis, the FHA performed better than Fannie Mae and Freddie Mac, which together needed $188 billion of support, but it still needed help — $1.7 billion from the U.S. Treasury.
The FHA acknowledges that having more thinly capitalized lenders may be an issue in the next crisis. Ed Golding, principal deputy assistant secretary at the Department of Housing and Urban Development, which oversees the FHA program, said that the FHA is charging enough for its insurance to absorb future losses. During the financial crisis, the FHA played a critical role in keeping mortgage credit flowing, guaranteeing more than a third of home purchase loans being made in some years after the housing market crash. That figure fell to 19 percent in 2014.
The FHA and lenders are fighting over how serious the underwriting errors are in loans that go bad. Quicken said in its lawsuit that the FHA’s parent agency, the Department of Housing and Urban Development, as well as the Department of Justice, both sought penalties from the lender for overstating a borrower’s income by just $17, or for lending $26 too much on a $99,500 loan.
“Characterizing such ‘transgressions’ as false claims upon which any damages should be owed ... is inconsistent with common sense, basic principles of fairness, and the FHA’s prior practices and procedures,” Quicken said in its lawsuit.
The DOJ lawsuit says that the lender submitted hundreds of loans for FHA insurance that it knew did not meet the agency’s standards, and Quicken’s problems were more serious than simple typos. It accused Quicken of having a “culture that elevated profits over compliance.”
A Justice Department spokeswoman would not address the Quicken lawsuit, but said via email that ”the conduct that the government has pursued reflects clear, systematic, and knowing violations of meaningful and substantive FHA requirements.
Reporting by Dan Freed; Editing by Dan Wilchins and John Pickering