In recent years, many of the nation’s largest banks moved away from Federal Housing Administration lending, scared off by the government’s increased use of the False Claims Act as a means to extract massive settlements from FHA lenders.
But it appears that’s all about to change, as FHA Commissioner Brian Montgomery said Tuesday that he believes the Obama administration went too far in some cases and said that the Trump administration is dialing back the use of the False Claims Act to bring more lenders back into FHA lending.
“Bank of America, [JPMorgan] Chase, and others barely offer the FHA product anymore. A lot of folks rely on a branch location. At last count, the largest depositories have more than 15,000 locations,” Montgomery told a group of reporters Tuesday.
“Quite a number of those have a loan officer in them. It just seems odd to me that if you walked into one of those and said we want to talk to you about an FHA loan, they’d tell you that we can’t help you,” Montgomery continued.
And the Trump administration wants to change that and bring more certainty around FHA lending back into the mortgage market, Montgomery said.
“I think the previous administration made some moves in the right place around the defect taxonomy and the loan review system,” Montgomery said. “But lenders still want greater certainty around what’s the bright line, what are the parameters, if you will.”
Montgomery noted the discussions between Department of Housing and Urban Development and the Department of Justice about changes to the use of the False Claims Act, which predated his arrival back at the FHA last month, and said that enforcement of FHA lending could be brought back under the FHA’s umbrella.
“That’s not to say that we’re going to look the other way on fraud and misrepresentation,” Montgomery said. “Quite the opposite. I just think that there’s a place for FHA to have that role and make that determination on what’s the appropriate punishment, if you will.”
According to Montgomery, the Obama administration may have pushed a little too hard in certain circumstances.
“A lot of servicers and lenders have paid somewhere north of $5 or $6 billion in settlements. In many cases, it drove a lot of depositories away from FHA. I think a lot of them just said we’re done,” Montgomery said. “And some of the False Claims Act cases, I’m not so sure that the punishment necessarily fits the crime.”
The rise of the False Claims Act being used as a weapon against FHA lenders took place during the Obama administration, with the DOJ accusing a number of lenders of violating the False Claims Act by knowingly originating and underwriting mortgages that did not meet FHA standards.
Under the Obama administration, lenders of various sizes, including some of the nation’s largest, agreed to pay out billions of dollars in settlements under the auspice of the False Claims Act.
Those efforts changed the complexion of FHA lending, with depositories like JPMorgan Chase moving away and nonbanks like Quicken Loans filling the gaps.
From 2013 through July 2017, Ginnie Mae, which issues mortgage-backed securities using FHA loans, experienced a significant shift in the source of its mortgage originations, with its share of nonbank originations rising from 37% in 2013 to 75% last year. In 2011, nonbanks made up only 11% of Ginnie Mae’s originations.
Last year, JPMorgan Chase CEO Jamie Dimon cited the False Claims Act as a reason that the bank moved away from FHA lending. Dimon previously said that the bank drastically cut its FHA lending in 2015 due, in part, to the risk of a False Claims Act charge from the government.
Dimon also said that that False Claims Act settlements “wiped out a decade of FHA profitability. And in 2015, Bill Emerson, then-CEO of Quicken Loans, told HousingWire: “The FHA has been hijacked by the Department of Justice” by the use of the False Claims Act.
The Trump administration, on the other hand, appears to have a decidedly different view on the False Claims Act, with HUD Secretary Ben Carson repeatedly saying that HUD is working with the DOJ on dialing back or ending the use of the False Claims Act against FHA lenders.
And according to Montgomery, increased certainty around the FHA’s lending rules coupled with a decreased threat of a government-extracted settlement will bring more lenders back to FHA loans.
“Some of my observations around missing gift letters, miscalculation of income, on their face could be material, but let’s just say the income was miscalculated, but if it was calculated correctly, the borrower still would have qualified. Is that an error?,” Montgomery said.
“I want to try to bring back some greater certainty on the bright line to get some of the depositories back into FHA fold,” Montgomery concluded. “I think that’s good for consumers. I think it’s good for Ginnie Mae. And I think it’s certainly good for FHA.”