From the WSJ:
A U.S. housing regulator is considering limiting one of the most powerful tools federal attorneys have to punish banks for making mistakes in mortgage lending, a move the Federal Housing Administration hopes will encourage banks to give more home loans to worthy but weaker borrowers, according to people familiar with the matter.
Since the mortgage crisis, the government has extracted billions of dollars in penalties from lenders that made mistakes on loans to borrowers who later defaulted. The errors ranged from small mistakes to ones that affected the riskiness of the mortgages.
Because banks must certify that FHA-backed mortgages they originate have no errors, when mistakes are found, the Justice Department has sometimes pursued damages under a Civil War-era law known as the False Claims Act that lets the government recover triple damages. In one high-profile application of the act, the Justice Department a year ago reached a $614 million settlement with J.P. Morgan Chase & Co.
Some banks, believing the penalties are too harsh relative to the errors made, have pulled back from originating mortgages backed by the FHA and argued that the broad “certification” they must make when originating a mortgage should be limited to significant errors. The agency, which doesn’t make loans but sells insurance to make investors whole if mortgages default, guarantees loans for a wide swath of middle-class and lower-income Americans, including those who can only make down payments of as little as 3.5%.
The FHA’s attempt to change the provision shows the tightrope policy makers and regulators are trying to walk. While they want to hold lenders accountable for crisis-era mistakes and retain recourse should the loans go bad, they also want the banks to extend loans to some consumers who have been largely shut out of the mortgage market since the crisis.
Lenders typically have pulled back on FHA lending by having more stringent requirements than what the FHA would allow. For example, even though the FHA will guarantee loans to borrowers with credit scores of as little as 580, on a scale of 300 to 850, a bank might not give loans to borrowers with a score below 640.
“The real question to me is, should we be in the FHA business at all?” said J.P. Morgan CEO James Dimon on an earnings call with analysts last July, as the bank still smarted from the $614 million penalty.
The bank seemingly followed through with its threat, reducing its FHA business by 74% last year, while the rest of the FHA market shrank by about 37%, according to trade publication Inside Mortgage Finance. Wells Fargo CEO John Stumpf also has made public statements critical of the government’s enforcement mechanisms and that bank’s FHA business has seen similar cuts.