The Federal Housing Administration or FHA is an extremely important department within the Department of Housing and Urban Development.
It is credited with righting the economic ship of this nation back in 1934 during the throes of the Great Depression.
The theory for its implementation by Congress was to help jump start the economy getting people to own their own homes. Prior to the FHA program, mortgage lending by banks was all over the map but one thing that was common to all mortgage offerings was the considerable amount potential borrowers had to put down to qualify for a mortgage kept most buyers away as down payment requirements could be as high as 50 percent of the purchase price.
FHA loans today only require a 3.5% down payment and due to this low down payment requirement it’s no surprise it’s a favorite among first time buyers.
The implementation of the FHA program provided a uniform set of guidelines banks could follow and should the loan ever go into default the lenders were compensated for the loss, something that banks couldn’t obtain lending directly to a buyer with the bank’s own funds. If a loan went bad the bank would be on the hook for the balance, losing a considerable amount of equity. Too many such bad decisions and the bank would be shut down.
As long as the lender approves a loan using proper FHA protocol the lender guarantee applies. Banks welcomed the FHA program with open arms.
For banks, FHA loans help establish long term relationships and opens up the bank for more client building benefits such as checking and savings accounts, consumer credit and other profit-centered lines of business.
Yet is that sill true today?
It doesn’t look like it.
The Beginning of The End of FHA Guidelines
According to a recent report by the American Enterprise Institute, large banks funded six out of every 10 FHA refinance loans in 2013. As of Q2 2016, that share has dropped dramatically to a paltry 6% share. Any such drop in any measured category clearly shows that going from 60% to 6.0% is more than just noticeable.
So, is the FHA program faltering?
No, not according to the same study. Again as of Q2 2016, non-bank lending has a 90% share of the FHA market. Home Point Financial is in this non-bank category.
These large banks apparently have made a conscious business decision to abandon the FHA market and opening up more opportunities for non-bank lenders to originate, process and fund this lucrative market while helping first time home buyers at the same time. Banks have been on the receiving end of costly lawsuits under the False Claims Act, enacted to protect taxpayer funds against fraud and abuse. Between the years of 1987 and 2013 the government recovered nearly $39 billion.
Banks in 2014 and 2015 were sued for underwriting FHA loans later alleged the banks issued mortgages that did not meet FHA requirements. According to the Department of Justice, three of these large banks, SunTrust Bank, MetLife Home Loans and First Tennessee Bank settled with the federal government for a total of $754 million. That’s just three banks. And they’re not the only ones.
Banks with a large retail presence immediately took notice and saw a big target on their backs. It was time to take that target off simply by halting production of FHA loans. Lawsuits filed under the False Claims Act don’t consider an FHA loan that was improperly approved but rather when a lender is proven to show consistent, systemic and documented activity over the course of FHA loan approval. When a number of FHA loans go into default, lenders are compensated for the loss. A large number of insurance payments to banks for this compensation alerts the FHA there may be a problem with a particular bank.
This string of lawsuits is strikingly familiar to the foreclosure crisis that began in late 2009 as consumers discovered-or were notified by legal firms- that even though they were in default of the terms of the loan and faced foreclosure, it was possible the bank didn’t follow proper foreclosure protocol in the state where the property was located and foreclosure proceedings were stopped. If you recall, the practice of “robo-signing” foreclosure documents came to light as banks falsely forged specific state-required documents including mortgage assignments, servicing transfers and default notices.
FHA Guidelines Are Still Strong
Yet all this doesn’t mean consumers can’t find an FHA lender. On the contrary. We’ve already pointed out that non-bank lenders have more than taken up the slack. Mortgage bankers, like Home Point Financial, don’t originate and process billions upon billions of FHA loans but instead concentrate on servicing their local markets. Relationships are important as relationships are the lifeblood of a mortgage banker.
Loans are approved locally. Loan officers are available to walk first time home buyers through the home buying process and more often than not the loan application for these future home owners is the FHA mortgage program. Not every time, as there are other options available, but if home buyers don’t have or don’t wish to put down a large down payment, the FHA loan is often the ideal option.
Mortgage bankers fund loans with their own credit line and sell the loans they make in the secondary market. Doing so replenishes credit lines enabling the lender to continue making still more loans. Now when an FHA loan goes into default, the institution who holds the line of credit takes notice along with the FHA. Too many defaults in a short period of time indicate the lender hadn’t approved loans using proper FHA guidelines.
There are of course times when a properly approved FHA loan goes into default when the borrowers experience a sudden event out of their control that causes them to lose their home. A loss of a job, extended illness or even worse, the passing of a family member. These types of defaults FHA understands. Otherwise, lenders who approve FHA loans that otherwise shouldn’t have been, could be forced not only to be unable to originate future FHA loans but lose their credit lines altogether, forcing them out of business.
At Home Point, we take great care in counseling our clients and approve loans using established underwriting guidelines and personal attention and are proud of our FHA heritage.
While the big banks have forced themselves out of the FHA business, we always have and always will be a dedicated, responsible FHA lender.
