Banks say that regulations stemming from the housing bubble of 2008 are discouraging them from providing FHA loans and tightening lending. An FHA insured loan is a mortgage loan backed by the US Federal Housing Administration, which is provided by a FHA-approved lender. FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. Criticism has stemmed from recent Department of Justice rulings and triple penalty fines issued by the government. JP Morgan Chase recently paid a $600 million fine on federal fines for originating $200 million in flawed FHA loans, but these banks are stating that unless clearer penalties and fines are discussed they might stop originating FHA loans altogether. “The real question to me is, should we be in the FHA business at all?” Jamie Dimon, CEO of JP Morgan Chase said. “And we’re still struggling with that.”
Dimon’s threat to stop FHA lending is meant to force regulators to shape the penalties more favorably for the banks. Currently, regulations have been severely tightened, and a minor underwriting error could possibly trigger the same penalty as massive fraud. Banks are under pressure to provide FHA mortgages to help meet federal laws requiring them to serve minority and low-income borrowers, but due to poor underwriting and the penalties associated banks are looking for a way out. The standoff is hurting the housing recovery and qualified, responsible lower-income borrowers as lenders tighten standards for FHA loans to avoid triggering the fines. Banks have important standards to reach when it comes to fair lending and the Community Reinvestment Act, under which they receive federal insurance. FHA helps them reach a more diverse group of borrowers that need access to credit. As John Taylor of the National Community Reinvestment Coalition states, “FHA accepts 3 percent down…Is Chase going to do 3 percent down [loans]? If he decides I’m not going to do FHA, does that mean his portfolio credit criteria are going to expand? The devil is in the details.”
A huge portion of the mortgages originated during the housing bubble were deeply flawed and poorly underwritten, typically filled with missing or falsified documents. And then we also had the issue of minority borrowers being targeted for much higher interest rates. As we get these things under control with better and more appropriate regulations, we also need to be concerned about credit access. It has been shown that homeownership education is a powerful resource that maximizes a borrower’s success, and when paired with targeted purchase assistance programs, can have a positive impact on a community. Credit access connected with good homebuyer education is one of the keys to a successful and thriving housing market that includes low-to-moderate income buyers.
Historically, banks have existed as entities founded on community development, a tool used to start small business and fund education, but recently they have strayed from this mission. Introduced by Councilmember Jack Evans, the Community Development Act seeks to leverage District funds to ensure the city’s financial institutions serve all of its residents. It is increasingly evident that financial institutions have strayed from their original mission; let’s ensure they get back on track!