Getting Government Out of the Mortgage Business, DOJ-Style

Yesterday Bloomberg reported that Federal Housing Administration (FHA) purchase loan guarantees “plunged” compared to a year ago. Part of that plunge, of course, was an expected decline in refinance activity. Currently, FHA endorsement activity is almost 80 percent purchase, whereas a year it ago it was just over half for purchase. Looking at trends in purchase endorsements, the decline looks a lot more moderate.

Even so, there has been a modest decline. Many in the banking industry, as expressed to Bloomberg, believe this is because FHA and the U.S. Deparment of Justice have been too tough on lenders, making them take back soured loans and assessing damages. JP Morgan CEO Jamie Dimon recently asked, because of the legal risk, “should we [JP Morgan] be in the FHA business at all?” 

Personally, this sounds like little more than jawboning. As illustrated by FHA’s recent credit reports, lenders are still dumping an awful lot of junk onto FHA. The average credit score is around a 680 FICO, meaning about half of FHA’s recent business is subprime. Beyond that, even subprime borrowers typically face downpayments of only around 5%, and then there’s the high debt levels witnessed. Lenders should be held responsible for making loans of such poor credit quality.

If DOJ fines on poorly performing FHA loans are chasing banks away from FHA, then I say “great.” That’s one of the reasons I helped get FHA new powers against fraud back in 2008 (see Section 2129 of HERA). As Congress is unlikely to ever scale bank the various mortgage subsidies, perhaps our only hope is that DOJ makes those subsidies so unattractive that lenders won’t use them. But then I could also see DOJ sue lenders, under fair-lending, for not using FHA.