While banks and lenders argue, loans for low-income borrowers take a nose dive

by Ryan Smith19 Sep 2014
As regulators and lenders continue to argue about who pays when risky loans tank, mortgages for low-income Americans are plummeting.

Federal Housing Administration loans plunged 19% in the nine months ending June 30 compared to the same period a year earlier, according to a Bloomberg report. Those loans are generally given to borrowers with weaker credit scores and require smaller down payments.

So why have FHA loans gone over the cliff? The simple answer: Big banks and big government can’t agree.

The nation’s largest lenders, such as JPMorgan Chase and Bank of America, have cut back on FHA loans out of fear they’ll be penalized for what they consider minor underwriting errors should the loans default, Bloomberg reported. Big banks have already paid more than $3 billion in fines for shoddy FHA loans made during the housing bubble.

“Years’ worth of profits can be wiped out with not that many loans that go bad if the government sues you over them,” , an analyst at Guggenheim Securities LLC, told Bloomberg. “Banks feel like they have to protect themselves by keeping standards tight.”

Some big banks are even wondering if they should be making the loans at all.

“The real question to me is, should we be in the FHA business at all?” JPMorgan CEO Jamie Dimon told investors during a July earnings call. “And we’re still struggling with that.”

The Department of Housing and Urban Development, for its part, wants the major lenders to keep making the loans. HUD’s message: Underwrite your loans better to begin with instead of simply pulling out of the market.

“With all our efforts, I want to send a simple message to lenders: let’s work together,” HUD Secretary Julian Castro said in a speech Tuesday. “Many have been reluctant to lend because they fear unanticipated consequences. They need to be able to manage their risk better –- and so does FHA.”