WASHINGTON — Big banks have drastically reduced their share of the Federal Housing Administration market, a massive shift that has big implications, according to new analysis by the American Enterprise Institute.
Large banks — which had a 60% share of FHA refinancings in late 2013 — had a 6% share as of May 31, according to Stephen Oliner, a resident scholar at AEI. Nonbank lenders currently originate 90% of FHA-insured refinancings, according to new data released by the group.
Large banks also had a 65% share of the FHA purchase market in 2012, which is now down to 20%, according to the AEI.
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The Justice Department filed suit Thursday against Guild Mortgage, arguing the firm violated the False Claims Act by improperly originating and underwriting Federal Housing Administration loans.
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The bank's new low-down-payment mortgage, an alternative to FHA loans, dispenses with the complex qualification requirements that have hampered recent efforts with low down payments by Fannie and Freddie.
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The government-sponsored enterprise was enthusiastic about launching the 97% loan-to-value product when it announced it in December 2014. But it has yet to become a sizable part of Fannie's business.
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"The shift away from large banks to nonbanks has been truly massive," Oliner said.
The recent drop in interest rates is expected to spur another surge in refinancings due to Britain's unexpected decision to leave the European Union.
But the large banks have decided that refinancing FHA loans is "not a good business" due to the regulatory environment and litigation risk, Oliner said.
"They are getting out," he said, noting that many FHA lenders have been sued under the False Claims Act and had to pay huge fines to the Justice Department.
Banks also do not get Community Reinvestment Act credit for refinancings. "So this is pretty much a lose-lose business for them," Oliner said.
