The contentious legal battle between Quicken Loans and the Department of Justice over the DOJ’s allegations that Quicken violated the False Claims Act by “knowingly” submitting hundreds of “improperly underwritten” loans insured by the Federal Housing Administration may just be enough to drive Quicken Loans out of FHA lending completely.
According to a report from Reuters, Quicken Loans, which is currently the largest FHA lender, is considering ending its participation in FHA lending entirely, citing the government’s aggressive enforcement policies as the main reason for potentially dropping FHA lending.
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 sued the DOJ and the Department of Housing and Urban Development earlier this year, stating that it was left with no alternative but to sue after the DOJ demanded Quicken Loans make public admissions that were blatantly false, as well as pay an inexplicable penalty or face legal action.
After Quicken sued the government, the government countersued Quicken in federal court in Washington, D.C., leading to a courtroom battle that’s been the talk of the housing industry for months.
In its lawsuit, the government alleged that from September 2007 through December 2011, Quicken “knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans.”
The government’s complaint alleged that Quicken instituted and encouraged an underwriting process that led to employees disregarding FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.
Quicken denied those charges, with Quicken Loans’ CEO Bill Emerson going so far as to say that the FHA “has been hijacked by the Department of Justice.”
Emerson made that allegation in a June interview with HousingWire.
Emerson told HousingWire that the FHA has its own review process for loans, but that process has been abandoned at the direction of the DOJ. “The FHA has its own process called the Post Endorsement Technical Review, but the DOJ has basically told FHA to abandon this process,” Emerson said.
“This is about extracting a payment settlement and getting us to suggest that our company did something wrong,” Emerson told HousingWire in June. “We’re simply not going to do that. We did not commit fraud against the government and we’re not going to cave to the DOJ’s demands and falsely claim that.”
Emerson told HousingWire that Quicken felt pressured by the government and had no intention of giving into the government’s demands.
“It’s beyond comprehension why we would not stand up and fight when we know we’re right,” Emerson said. “That’s exactly why we filed the case. We’ve been very clear on where we are. We are the largest FHA lender and the highest quality lender by FHA’s own objective measurements standards.”
Emerson told HousingWire that the government’s efforts to extract a settlement are based on a minuscule number of loans.
“We’re talking about 55 loans that the DOJ said had an issue with out of the 250,000 FHA loans that we’ve done in that time period,” Emerson said. “We refuted 47 of those, so we’re only really talking about eight of those.”
Emerson told HousingWire that the government’s tactics are hurting potential homebuyers.
“We feel this process is over-reaching and illegal,” Emerson said, speaking of the DOJ's tactics.
“The people that are being harmed by the DOJ are American homebuyers,” Emerson continued. “These people are now having a harder time getting an FHA loan. It’s now more difficult for people to get an FHA loan and that’s not what FHA is all about.”
Now, Quicken is considering quitting FHA altogether.
Perhaps this move isn’t as completely out of left field as it may seem.
In October, Quicken announced a partnership with Freddie Mac to offer a series of unique, co-developed lending products to meet the needs of emerging markets, including Millennials, first-time homebuyers and middle-class borrowers.
The program will explore numerous modifications and expansions to Freddie Mac’s current Home Possible mortgage products, which enables eligible borrowers to finance a house with a down payment of as little as 3%.
And Quicken Loans isn't the first lender to consider pulling back from FHA lending.
John Shrewsberry, Wells Fargo’s (WFC) chief financial officer, recently said that the San Francisco bank will not make loans to FHA borrowers with low credit scores because of their higher rates of default.
In addition, Kevin Watters, CEO of Chase Mortgage Banking, said in an interview with CNBC that the FHA's loan requirements look an awful lot like subprime lending.
"FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down; that's subprime lending, and we're not in the subprime lending business," CNBC quotes Watters saying.