BAC Takes a Shot at the Power
February 26, 2016
Big news: Bank of America (BAC) is creating a program to issue mortgage loans to folks with as little as 3% down without insurance from the Federal Housing Administration (FHA). Official plans will be announced on Monday, but the gist of program is that it is supposed to help low- and moderate-income borrowers get home loans without having to pay the monthly insurance premiums required for low-down-payment (under 20%) loans by the FHA.
The goal is to make mortgage loans cheaper for borrowers who do not have the cash readily available to put down a full down payment. By not requiring mortgage insurance, BAC will cut the FHA out of the lending process. Instead, the loans will be backed in partnership with mortgage-finance giant Freddie Mac and the nonprofit Self-Help Ventures Fund.
In order to be eligible for the new loans, borrowers must have a credit score above 660, an income that is less that the area’s median and the home must be the borrower’s primary residence.
Here’s how it will work: After Bank of America makes a mortgage loan, it will sell it off to Self-Help. From there, Self-Help will sell it to Freddie Mac. If the mortgage defaults, Self-Help will be the first to feel the losses. If the nonprofit isn’t able to recover the full amount of the loan, then Freddie Mac will start to take a loss as well. Either way, there is no FHA-backed insurance involved.
In addition to financial relief, Self-Help will also provide counseling to those struggling to pay back their loans. It believes that this will help more people avoid foreclosure, which is why the nonprofit is also in talks with other lenders to unveil similar programs.
Bank of America’s new mortgage lending program is a shot across the bow from an industry that’s ready to fight back against what it sees as a massive abuse of power. In fact, many of the big banks have been moving away from the FHA over the last few years as they’re worried about the risk of being hit with future penalties for minor errors. The FHA has recently won big settlements from banks for these errors, including $800 million from BAC, $1.2 billion from Wells Fargo (WFC) and $614 million from JPMorgan Chase (JPM). And nonbank lender Quicken Loans is currently undergoing a similar battle.
While nonbank lenders (like Quicken Loans) have tried to take the place of the FHA in the mortgage lending process, it’s made it that much more difficult for low-income borrowers to get the loans they need. In the end, the FHA’s major fines have slowed lending to a crawl, and even Quicken Loans has threatened to stop issuing mortgages altogether.
Yes, this new program is a high risk for the private organizations, but it’s the way I believe markets are supposed to work. I only worry about the extent of taxpayer exposure to this via government-owned entities. Right now, both Fannie Mae and Freddie Mac are gutted for almost all the cash they net, which makes them an amazing piggy bank for the Federal government. Still, I like the notion that the private sector is stepping up after the private mortgage insured (PMI) market crashed following the market collapse and government intervention.