Quicken Loans is reportedly considering getting out of Federal Housing Administration (FHA) lending.
According to a Reuters report, Quicken, one of the largest providers of FHA loans, is considering backing out of the program after the U.S. Department of Justice (DOJ) and the U.S. Department of Housing and Urban Development (HUD) brought a lawsuit in April alleging that the company did a shoddy job of underwriting FHA-backed loans.
Specifically, the DOJ alleges that Quicken Loans instituted and encouraged an underwriting process that led to employees disregarding FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.
For example, the company had a ‘value appeal’ process in place whereby company managers would ask appraisers to sometimes inflate the value of homes when the value came in too low in order for the borrower to qualify for an FHA-backed loan, federal authorities allege.
Quicken also allegedly granted ‘management exceptions’ whereby managers would allow underwriters to break an FHA rule in order to approve a loan.
Convinced the company is being unfairly targeted, Quicken officials preemptively filed a countersuit a few days before the DOJ's suit had been filed.
In the countersuit, Quicken officials reveal that the company had been under investigation for three years regarding its practices and policies in underwriting FHA loans. They say the company is being targeted as part of a ‘political agenda under which the DOJ is 'investigating' and pressuring large, high-profile lenders into paying nine- and 10-figure sums and publicly 'admitting' wrongdoing.’
Quicken officials allege that the findings of the DOJ/HUD lawsuit are based on a ‘faulty analysis of a miniscule number of cherry-picked mortgages from the nearly 250,000 FHA loans the company has closed since 2007.’ They allege that only minor defects were found in a sampling of 55 of about 246,000 loans. These defects included miscalculating a borrower's income by $17 and lending a borrower $26 too much.
‘After three years of struggling to understand the DOJ's position and methodology that would warrant the country's largest and highest-quality FHA lender to make untrue admissions and pay an inexplicable penalty or face public legal action, it is time to ask the court to intervene,’ Bill Emerson, CEO of Quicken Loans, says in an April statement. ‘No threat, including high-profile senseless lawsuits from powerful federal officials, will deter our company and its leadership from doing the right thing. We will stand in defense of our impeccable reputation established by thousands of hard-working, ethical team members over our 30-year history.’
Dan Gilbert, chairman and founder of Quicken Loans, told Reuters that the company is now considering either cutting back on FHA loans or exiting the program entirely so as to reduce its risk.
New underwriting requirements recently implemented by the FHA in order to help the agency reduce taxpayer risk, cut its losses and keep its reserves at federally mandated levels have resulted in increased scrutiny of FHA-backed mortgages. This increased scrutiny, in turn, is resulting in more mortgage ‘defects’ being uncovered in post-closing audits, and as a result, many lenders are being forced to repurchase ‘defective’ loans after borrowers default.
Three other major mortgage lenders – JPMorgan Chase, Bank of America and Wells Fargo – have also expressed frustration with the FHA's underwriting requirements. All three have recently scaled back their lending through the program, Reuters reports.
As the article points out, the FHA program, which saw its first-ever bailout in 2013 – to the tune of $1.7 billion – could end up in jeopardy again if several major U.S. lenders decide to back out of the program.