Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. are among mortgage servicers that may face $13.5 billion in costs if the Federal Housing Administration rejects insurance claims on soured loans, according to FBR Capital Markets Corp.
Denials from the FHA, which insures loans made by banks and private lenders for home purchases, could be the latest expense from U.S. housing programs, Paul Miller, an FBR analyst, said Monday in a note to clients. The government said in May that it could pursue other lenders after suing Deutsche Bank AG for more than $1 billion, accusing the firm of lying to the FHA while arranging mortgage insurance.
“The servicing of FHA loans comes with highly technical regulatory mandated procedures,” Miller said in the note. “The agency’s narrowly proscribed requirements make it more likely for the servicers, not the originators, to be tripped up. If the agency is looking for a way to deny a claim, the servicing process is an easy target.”
Lenders and servicers have faced surging costs as U.S.- owned Fannie Mae and Freddie Mac demanded that banks repurchase defective loans and the U.S. sued 17 firms to recoup losses on mortgage-backed securities. Bank of America has plunged 59 percent in New York this year, falling below $6 today for the first time since 2009. JPMorgan and Wells Fargo have dropped 32 percent and 25 percent, respectively.
The FHA also could target lenders, which may result in $11.5 billion in additional costs, Miller wrote. The agency has been focusing on “procedural issues,” rather than the quality of collateral behind mortgages, making it more likely that servicers will face scrutiny, he wrote.
Borrowers have turned more to FHA-backed loans after the collapse of subprime lenders, according to Miller. The FHA covers about 10 percent of all mortgage debt outstanding, up from 4 percent in 2006. The insurance program has $4.7 billion in capital against a $1 trillion portfolio, he wrote.
“If housing prices decline further, more loans could become delinquent and the agency’s capital buffer could creep toward zero,” Miller wrote. “The agency could turn to widespread claim denials in order to reduce losses to its insurance fund.”
Bank of America Chief Executive Officer Brian T. Moynihan was asked during a June conference whether he was concerned that the FHA would reject the lender’s claims.
“I’d say it is a risk,” said Moynihan, 51. “All of us, as we think about the mortgage business, continue to think about how you do business with various counterparties if their behavior can change on you during stress times.”
Jerry Dubrowksi, a spokesman for Charlotte, North Carolina- based Bank of America and Tom Kelly of New York-based JPMorgan declined to comment. Vickee Adams of Wells Fargo, based in San Francisco, and the FHA’s Tiffany Thomas Smith didn’t immediately return phone calls seeking comment.
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