In 2011 banks originated 89% of all FHA loans, but by last year banks only originated 25% of all FHA loans according to Ginnie Mae. Why did banks quit closing so many FHA loans? Bill Emerson, then-CEO of Quicken Loans said in 2015, “The FHA has been hijacked by the Department of Justice” with their use of the False Claims Act to sue banks for making mistakes when underwriting FHA loans.
The Department of Justice sued banks for tens of billions of dollars under the False Claims Act from the Civil War era and in response banks quit offering FHA loans. So, lower income borrowers, credit damaged borrowers, and minorities were not able to become homeowners.
Last week FHA’s new Commissioner Brian Montgomery said that the Trump Administration is dialing back or even ending the use of the False Claims Act by the DOJ and HUD. Instead, FHA lending and enforcement is being brought back under the FHA’s umbrella. But, Brian warned, “That’s not to say we are going to look the other way on fraud and misrepresentation.”
The goal is to bring more certainty with FHA loans for all lenders especially banks. In essence the False Claims Act will no longer be used as a weapon against banks. Brian, said, “if income was miscalculated (by the lender), but if it was calculated correctly, the borrower would have still qualified, is that an error?” The previous administration would sue for the error even though the error didn’t cause a loss for FHA. This policy is now ending. This is incredibly welcome news.