Lenders leery of penalties, pull away from FHA loans

The nation’s largest home lenders are curtailing their involvement in Federal Housing Administration loans, known for small down payment requirements and help to first-time buyers and lower-income Americans.

Lenders say they are concerned that they will be penalized if underwriting errors occur and the loans default. Therefore, they’re backing away from issuing the loans.

FHA loans have plummeted 19 percent in the nine months ending June 30 compared to a year earlier. Wells Fargo, the nation’s largest home lender, saw FHA originations drop 82 percent in the first six months of this year compared to the same time period in 2013, according to Inside Mortgage Finance data. Bank of America saw a 72 percent drop in that time, followed by JPMorgan with a 55 percent drop.

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

Lenders’ attitudes toward FHA loans have turned sour after facing steep settlements recently from the Department of Justice and federal regulators. JPMorgan Chase & Co., Bank of America Corp., and others have already paid more than $3 billion in fines for originating faulty FHA loans during the housing bubble.