Bank Giant Is More Cautious Over FHA Loans

DAILY REAL ESTATE NEWS | TUESDAY, SEPTEMBER 22, 2015

JPMorgan Chase is treading carefully over originating Federal Housing Administration loans, a loan product designed to help first-time home buyers with lower credit scores and less down payments. Growing regulations and threats over litigation from government regulators have mostly stalled originations of FHA loans.

Read more: More Buyers Take Advantage of FHA Loans

"FHA requirements are down to a 520 FICO [credit score] and you only have to put 3.5 percent down; that's subprime lending, and we're not in the subprime lending business," Kevin Watters, CEO of Chase Mortgage Banking, told CNBC. JPMorgan Chase is the second largest mortgage lender in the country. With FHA loans, however, it doesn't even fall within the top 100.

Chase Mortgage has not stopped originating FHA loans entirely. However, it's FICO requirements are higher and its loans are more expensive to price since they view them as riskier.

"It's not just the [Consumer Financial Protection Bureau] or Fannie and Freddie's rules or Treasury's rule's or Ginnie Mae, who's the servicer for FHA—you've got 584 different state and local rules too," Watters says. "So you're trying to make sure you abide by all these different rules, and it just gets very complicated, very expensive, so for us in FHA, we've priced FHA for the risk we see in FHA, and so we've got a higher price than other people so customers are going to other places."

Wells Fargo, the nation's largest mortgage lender, also has raised minimum FICO score requirements for FHA borrowers.

Some independent lenders, however, are stepping up to fill in the gap from big banks with FHA lending.

But big banks' move away from low-down payment options for home buyers is hindering the housing market, says Lawrence Yun, the National Association of REALTORS®' chief economist.

"I believe that it will have a measurable impact in holding back some of the first-time buyers," Yun told CNBC. "Therefore I think from a government policy point of view, they need to look at, very broadly, any mistake the lender has done or broken the law and go after it, but any uncertain lawsuit that comes out of right and left [field], that's going to hold back the market recovery."

Source: "Chase Mortgage CEO Red Flags FHA Loans," CNBC (Sept. 21, 2015)