The Big Banks have suddenly decided to move traditionally underserved borrowers into loans guaranteed by the Federal Housing Adminsitration (FHA).

For years, FHA lending made up only a small fraction of mortgage loans. One source quotes a Wells Fargo representative who says that FHA lending made up only three percent just a few years ago.

The main difference between FHA loans and conventional products is that there is a lower down payment requirement. FHA asks for a downpayment of at least 3.5 percent. Conventional loan terms fluctuate, but in the past year most borrowers have had to put up at least 20 percent in order to buy a home. For investors the number has been much higher.

FHA counters the risked posed by higher LTVs by requiring borrowers to purchase mortgage insurance at the outset of the loan, and to pay a premium for new insurance for as long at the LTV remains at a certain level. The result is that FHA loans, while bearing the same interest rate, will usually have a much higher APR.

There are other appeals for an FHA loan. Third parties (home builders, relatives, employers, non-profits) can contribute to the down payment. On the other side, sellers are allowed to contribute to closing costs.

Things have changed dramatically since the credit crisis. One of the interesting things is that there has been an improvement in the kinds of borrowers that use FHA. According to HUD, the average credit score for an FHA loan  went up from 621 in early 2008 to 692 by the middle of 2009. Do the math: that is a gain of more than 70 points!

Some lenders appear to have made a strategic decision to make loans to underserved groups through FHA. The table that follows lists twenty banks from the S&P 900, along with the share of loans that they originated through FHA. There are four segments: minority borrowers, low-income borrowers, low-income neighborhoods, and rural loans.  

The Big Banks are Making their Loans through FHA

The Big Banks are leading the charge. These top ten are most of the largest banks in the country. Citigroup is an absence, but they have pulled back in mortgage lending.

This analysis includes both FHA and conventional loans on site-built homes. Only loans by owner-occupants are included. There are no home equity loans here – only purchase and refinance loans.

Other observations:

Some banks rely on FHA in rural areas. Fifth Third scored high on this list because they are so dependent upon FHA outside of the cities. It is the same story with M&T Bank. Astoria Financial has a high score, but it can be discounted due to sampling size.  Almost all of AF’s loans are made in the New York metro area.

The big bank that isn’t relying on FHA? BB&T. The Best Bank in Town makes plenty of loans, but they’re not going after the FHA borrowers. For a long time, BB&T has insisted that they are happy to walk away from loans. Maybe their thinking is that they don’t want to let a guarantee push them into making a loan that they otherwise wouldn’t originate.  

A few banks are making almost all of the FHA loans. When the numbers show that JP Morgan, Bank of America, and Wells Fargo are active in FHA than are other banks, then it follows that their share of the market is very large.  These three banks accounted for 79 percent of FHA loans to minority borrowers.  Throw in SunTrust and Fifth Third, and five banks make 90.3 percent of FHA loans to minorities. For low-income borrowers and loans made in low-income neighborhoods, the top five’s share is nearly as dominant – 85.7 percent and 83.5 percent.

This leads into another issue. Rural lending is not the province of small town banks. There are about 60 lenders in this analysis. The big five had 73 percent of all FHA in rural areas, and 55.6 percent of all conventional loans.

While BankTalk goes to great length to excoriate (big word!!!) the immediate providers of refund anticipation loan dollars, there are other financial institutions that make RALs possible.

Wells Fargo, for instance, is providing the credit lifeline that keeps Jackson Hewitt in business.  On April 30th of this year, Wells entered into a new definitive material agreement to restructure $200 million of debt to Jackson Hewitt. A key fact, in my mind, is that the loan specifies that Wells’ willingness to finance JTX is dependent upon the RAL business.

A source from a New York investment firm tipped me off on this.  He said that Wells has a (more…)

There is nothing quite like a loan that you don’t have to pay back.

At least, that is what a few of the top executives at Wells Fargo must be thinking to themselves: Dick Kovacevich, Richard Levy and James Strother are all recipients of Wells’ special loan program for executive officers.  Wells discontinued the program on June 30th, 2002, but officers who already had loans under the “Relocation Program” were not required to pay back the outstanding principal.

Kovacevich received his $995,000 loan in 1998.  Levy received $325,000 in 2002. And Strother received $310,000.

In 2008, the group made interest and principal payments of $0.  That’s a pretty good deal.

Interestingly enough, these loans seem to have to do with moving costs then they do to the position of the loan applicant.  Levy, for example, moved from New Jersey to California in 2002, whereas Kovacevich moved from Minnesota to SF four years later.  Presumably, distance and inflation mean that Levy had a higher moving bill.  There’s also the likelihood that the cost of selling a home might be more, if only due to realtor’s fees.  Then again, Wells was also willing to buy the home of an officer under this program. Oh, and they were also pretty much willing to pay most of the mortgage costs on the new home, too.

The details on this are fairly complicated.  They are described on page 38 of this year’s proxy.  The explanation seems to provide the specifics, but they avoid the larger truth – that this serves to undermine the SEC rules on salaries.  The SEC allows officers to have any salary that their company decides, but taxes are not deductible for salaries above $1 million.

Moreover, new rules after 2002 only sweetened the deal.  Now, the company will buy (through a third party) the home that an officer sells in order to relocate (at appraised market value).  They will also pay the taxes on any amounts received by an officer for relocating.  Also, they pay all transaction costs (closing costs, realtor fees, titling, et al).