Banks are expected to benefit from the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions.
Ben Carson, secretary of the HUD, recently announced that it has reached an agreement with the Department of Justice ("DOJ") to ensure the proper and appropriate use of the False Claims Act (“FCA”) against violations by lenders who provide mortgage loans insured by the Federal Housing Administration (“FHA”).
The FHA provides insurance on mortgages that are originated by lenders for low-income borrowers, who otherwise would not be eligible for home loans because of their low credit scores.
In 2010, banks represented almost 45% of the lenders, who originated FHA-insured mortgages. However, now, banks represent only 15% of the lenders, who originate or provide mortgage loans to low-income borrowers.
This is because, after the 2008 financial crisis, the Obama government used the FCA to build cases against banks providing such loans and imposed huge penalties. Banks were made to pay billions of dollars for wrongly underwriting mortgage loans to borrowers and certifying them as eligible for insurance by the FHA, thus leading the government to pay out insurance, when the borrowers defaulted.
In 2014, Bank of America BAC was made to pay $1 billion to settle an FCA case, which alleged that the bank fraudulently sold defective mortgages to Fannie Mae FNMA and Freddie Mac FMCC. In the same year, JPMorgan JPM coughed up $614 million for wrongly underwriting mortgage loans and submitting the same for insurance coverage when those were not eligible. Further, Citigroup’s C mortgage accord of $7 billion was reached in July the same year.
In 2016, Wells Fargo WFC agreed to end a three-year-old mortgage litigation filed by the U.S. government regarding the bank’s FHA lending program. The settlement amounted to around $1.2 billion.
Thus, the Memorandum of Understanding (“MOU”), which has been issued by the DOJ and the HUD, aims not to file cases against banks on similar grounds and encourages banks to originate more mortgages insured by the FHA. The MOU is issued to provide transparency and clarity on what steps banks should take to avoid paying fines.
Per the agreement, going forward, the HUD and not the DOJ will enforce cases, involving underwriting mistakes. The memorandum also makes it clear which level of underwriting violation will prompt possible sanctions.
As the reliance on the FCA will reduce, banks will not have to worry about billions of dollars in provisions that they made earlier. Also, as legal provision costs will likely decline, it would ease the pressure on banks’ bottom line.
Amid an improving economy, with relatively lower interest rates, if banks extend more loans to home buyers, it would support their mortgage-related income. Moreover, as demand for mortgage loans is already on the rise due to a decline in rates, if banks originate more FHA- insured mortgage loans, it would help in relieving pressure on margins to some extent.
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