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Federal Mortgage Agency Says More Needed to Police Nonbank Lenders

wsj.com | April 29, 2015

By Joe Light

A government mortgage agency says it needs more resources to police the growing ranks of companies rushing to fill the void left by big banks that have stepped away from the market for riskier home loans.

Ginnie Mae is asking for more staff in part to vet the rising number of nonbank lenders making loans insured by the Federal Housing Administration, whose program makes it possible for borrowers with weaker credit to get loans with down payments as low as 3.5%.

The FHA’s mission is to make homeownership more available for first-time buyers and other less-wealthy borrowers. In exchange for putting little cash down, borrowers pay insurance premiums, which result in higher mortgage payments.

In the past year big banks, such as Wells Fargo & Co. and Bank of America Corp. , have pulled back sharply from the market after a series of multimillion-dollar legal settlements for mistakes made during the crisis. The U.S. Department of Justice has said the banks defrauded the government by submitting loans for insurance by the FHA that weren’t eligible by misstating borrowers’ incomes or property values. The banks admitted fault in most cases, but some now say they were treated unfairly.

The pullback has left an opening for nonbank lenders, such as loanDepot LLC and Guild Mortgage Co., to grab market share. Ginnie Mae, which backs mortgage securities that include FHA and other federally insured loans, expects nonbank lenders to account for about 60% of its business this year, up from about half last year and less than a fifth in 2011.

While the nonbank lenders face oversight from state regulators and some federal agencies, such as the Consumer Financial Protection Bureau, they aren’t subject to the same level of scrutiny from other big regulators such as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, said Ginnie Mae President Ted Tozer.

“There’s just not all these other agencies looking at them that we have with banks,” said Mr. Tozer.

Wells Fargo, which is in the midst of a Justice Department lawsuit related to FHA loans, posted a 74% drop in FHA loan volume in 2014 over the previous year, according to trade publication Inside Mortgage Finance. Bank of America, which last August agreed to pay $800 million in FHA-related damages, cut its volume by 69%.

J.P. Morgan Chase & Co., which agreed to pay $614 million last February to the FHA, made 74% less in FHA loans in 2014.

“We’re just thoroughly confused about how we got treated [by the FHA],” said J.P. Morgan CEO James Dimon on a conference call with analysts last July. “We’re going to be very, very cautious in that line of business.”

Higher mortgage costs and interest rates helped drive down the overall volume of FHA loans by 37% to $134.6 billion last year, according Inside Mortgage Finance.

On the other hand, Quicken Loans Inc., the nation’s largest nonbank lender, boosted its market share by two percentage points last year to 6.3%. LoanDepot's market share more than quadrupled to 2.4%, while Guild Mortgage’s share increased about 0.6 point to 1.6%.

Edward Golding, who heads the FHA, said his agency doesn’t try to control the mix of banks and nonbanks participating in the program.

“We’re personally very comfortable with the shift,” said Mr. Golding. “We want to make sure the borrower gets the right loan. That’s what we monitor and that’s what’s important to us.”

There are potential risks to taxpayers stemming from the rise of nonbanks. Lenders that pool and service Ginnie Mae-backed mortgages are responsible for keeping payments flowing to bondholders even as the borrowers behind loans slip into and out of delinquency, which can cause liquidity problems for some nonbanks, said Mr. Tozer of Ginnie Mae.

In the past year, Mr. Tozer said, his staff has had to advise some nonbanks on how to create liquidity to make those payments. Without extra staff, he might increase Ginnie Mae servicers’ cash reserve requirements, a move he thinks could increase borrowers’ costs by more than 0.1 percentage point.

Taxpayers also can face an increased risk from nonbanks that might not have the financial wherewithal to pay penalties down the line if their own loans have mistakes, said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.

Quicken Loans, the largest nonbank lender, already is running into the same kind of legal trouble that prompted the big banks to retreat. Last Thursday, the Justice Department brought a lawsuit against Quicken, claiming the company defrauded the government by making loans to borrowers it knew couldn’t repay.

The lawsuit came on the heels of a lawsuit by Quicken against the government, alleging that Justice Dept. officials had tried to pressure executives into settling for fraud they didn’t commit.

Depending on how the litigation goes, Quicken might follow the big banks and pull back from making certain mortgages, said Quicken Loans Chairman Dan Gilbert.

“You’ve already seen a serious backup from the FHA program among major banks and lenders in the country,” Mr. Gilbert said. “A significant amount of it has been because of this.”

A Justice Department spokeswoman in a statement said that the pursuit of Quicken and others was justified: “The conduct that the government has pursued reflects clear, systematic, and knowing violations of meaningful and substantive FHA requirements, rather than isolated, good-faith efforts to comply with those requirements.”


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