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IT IS HAPPENING...AGAIN
http://online.wsj.com/article/SB10001424052702303296604577450810342727388.html
By NICK TIMIRAOS
Federal officials are broadening their investigations of mortgage lenders that use a popular federally backed mortgage program, a move that could force more banks to pick up some of the rising tab for losses at the Federal Housing Administration.
U.S. attorneys already have reached settlements with four banks, Bank of America Corp., BAC -1.48%Deutsche Bank AG, Citigroup Inc. C +0.37%and Flagstar Bancorp Inc., FBC +0.13%recouping $1 billion for the FHA.
Last month, the inspector general for the Department of Housing and Urban Development, which oversees the FHA, issued subpoenas seeking information from additional lenders, including MetLife Inc., MET -0.17%SunTrust Banks Inc. STI -0.09%and U.S. Bancorp, USB +0.24%among others, according to people in the banking industry.
The FHA doesn't make loans but instead insures lenders against losses on mortgages that meet its standards. In the past, the FHA has looked into whether lenders ignored cases of potential fraud and failed to properly verify borrowers ability to pay. The subpoenas could be used to uncover potential violations of FHA program rules. If they discover violations, the findings could be used to strike a financial settlement with the lenders.
The moves are the latest sign that officials are trying to protect the FHA from needing a taxpayer bailout by recouping losses from lenders. Representatives for HUD and the inspector general's office declined to comment.
Representatives for the banks declined to comment. MetLife, which disclosed the receipt of two subpoenas in a federal filing last month, earlier this year said that it would exit the mortgage business.
The scrutiny also raises the possibility that lenders will become more cautious when underwriting government-backed loans. "Lenders are practicing the mortgage equivalent of defensive medicine," said Brian Chappelle, a former FHA official who runs Potomac Partners, a mortgage consultant. "Instead of requiring more tests, lenders are excluding more borrowers to protect themselves from liability that they feel they could not otherwise protect themselves from."
Last month, Wells Fargo WFC -1.12%& Co. told lenders that it would no longer purchase FHA-backed loans with credit scores below 640 beginning June 11, though it continues to make those loans available through its retail division. A bank spokesman said the change was the result of regular adjustments of credit policies.
U.S. Bancorp originated $3.3 billion in government-insured mortgages during the fourth quarter, making it the fourth-largest lender of government-insured loans during that period, according to Inside Mortgage Finance, an industry newsletter. MetLife and SunTrust ranked 12th and 15th, respectively.
The FHA wasn't heavily involved in the mortgage bubble because private lenders provided credit on easier terms. But the agency saw a surge in business beginning as the private market seized up in 2007 and later as Fannie Mae and Freddie Mac tightened standards. The FHA allows buyers to make down payments of just 3.5%, which has made it the last major outlet of low-down-payment mortgages.
Fannie and Freddie can more easily force banks to buy back delinquent loans that are found to run afoul of their lending standards, and banks have imposed tougher lending standards than what the mortgage companies require in order to deter against those costly buybacks, which have cost lenders billions of dollars.
The FHA insured more than 700,000 mortgages that were 90 days or more past due or in foreclosure at the end of March, representing about 9.4% of all mortgages it guarantees.
While the agency had $32.3 billion in reserve at the end of March, its independent audit last fall estimated that after expected losses on its current business, it would have just $2.7 billion to cover unexpected losses on more than $1 trillion in loan guarantees.
A more conservative forecast by the White House's budget office in February found that without the recent settlements, the FHA would have been short nearly $700 million, requiring a taxpayer infusion for the first time in its 78-year history.