New York (BBN)-In a conference call with analysts following the release of its second quarter earnings report Tuesday, JPMorgan CEO Jamie Dimon took the time to single out Federal Housing Administration (FHA) backed lending as a source of risk for the Megabank.
In February, the bank announced that it would pay $614 million to settle claims that it had improperly approved thousands of government backed mortgages, including those approved by the bank as a participant in the FHA's Direct Endorsement Lender program, reports DSnews.
Under the program, lenders who have direct endorsement power can consider single-family FHA mortgage applications without first submitting paperwork to HUD.
Skipping that step allows FHA mortgages to be processed as rapidly as other mortgages.
Dimon said that the bank’s FHA business has cost them money.
“So the real question is should we be in the FHA business at all? We’re still struggling with that,” Dimon said. "Until they come up with some kind of safe harbors or something, we're going to be very, very cautious in that line of business," Dimon said.
JPMorgan is not alone in its struggle with FHA compliance.
In June, Suntrust Banks, Inc. announced that it would pay $418 million to resolve its potential liability for originating and underwriting FHA loans between January 2006 and March 2012 that did not meet agency requirements.
The problem is a catch-22 for the banks. FHA backed lending is in place so that riskier borrowers have access to credit and, in theory at least, lenders make higher profits because the pool of qualified borrowers increases. The problem is that with that riskier clientele comes with a higher risk of default.
After the fact, government auditors have the power to scrutinize defaulted loans and demand repayment from the bank if they determine that the bank has not underwritten the loans according to HUD standards.
From the tone of his comments on Tuesday, it could be inferred that JPMorgan does not believe the process to be fair. Dimon said that his organization was “thoroughly confused” by the government treatment of the bank during the settlement process.
Whether Dimon is serious about pulling out of the FHA business or not remains to be seen but the consequences would likely be felt by consumers. JPMorgan is the nation’s second largest mortgage lender.
BBN/AS-16July14-3:00pm (BST)