Bank of America Corp. is rolling out a new-mortgage product that
would allow borrowers to make down payments of as little as 3%, in
a move that would represent an end run around a government agency
that punished the bank for making errors on similar loans.
The new mortgage program, which the Charlotte, N.C.-based lender
plans to unveil on Monday, will let borrowers avoid private
mortgage insurance, a product to protect mortgage lenders and
investors that is usually required for low-down-payment loans.
That could make the new loans cheaper than those offered through
the Federal Housing Administration, the government agency that has
won big settlements from banks in recent years for what the lenders
describe as minor errors.
The FHA doesn't make loans but insures lenders against default
on mortgages that can have down payments of as little as 3.5% and a
credit score of as low as 580, on a scale of 300 to 850. When
lenders make the loan, they have to certify that everything in a
loan file is accurate.
Bank of America's new mortgage cuts the FHA out of the process.
Instead, the new loans are backed in a partnership with
mortgage-finance giant Freddie Mac and the Self-Help Ventures Fund,
a Durham, N.C.-based nonprofit.
Bank of America agreed to pay $800 million to settle claims of
making errors on FHA-backed loans in 2014. This month, Wells Fargo
& Co. said it would pay $1.2 billion to settle similar claims,
joining J.P. Morgan Chase & Co., which settled in 2014, and
other big lenders which have settled over the past few years.
Nonbank lender Quicken Loans Inc. is currently fighting such
claims.
Many big banks have pulled back sharply from FHA-insured lending
in the past few years, citing the risk of being hit with penalties
for minor errors. A raft of nonbank lenders have rushed in, but the
banks' retreat from the program has made it more difficult for
low-income borrowers to get home loans.
"We need an alternative in the marketplace that helps
creditworthy borrowers with a track record of paying debts on
time," said Bank of America managing director D. Steve Boland, who
noted that "We think there are still a lot of uncertainties out
there in working with FHA."
After making a mortgage under the new program, Bank of America
will sell it to Self-Help, which then sells it to Freddie Mac. If a
mortgage defaults, and Self-Help isn't able to recover the full
amount owed, Self-Help takes a big chunk of the losses before
Freddie Mac starts to take a loss, which lets borrowers avoid
paying mortgage insurance.
Self-Help also gives counseling to borrowers who struggle to
pay, which it believes will help more people avoid foreclosure.
"We believe the mortgage-lending sector is underserving families
of modest means," said Self-Help CEO Martin Eakes. Mr. Eakes said
that his fund also is in talks with other large and small lenders
to roll out similar programs.
Mr. Eakes said Self-Help didn't need new funding for the Bank of
America program, but in the past the organization has received
funding for other loan programs from foundations, the government
and companies.
Mr. Eakes is also CEO of the Center for Responsible Lending, a
nonprofit advocacy group for borrowers that in the past has also
asked the FHA to limit lenders' damages for some errors.
To get the loans under Bank of America's new program, borrowers
must have a credit score of at least 660, which is higher than
FHA's requirement, and an income that is less than the area's
median.
Bank of America said that for now it is capping loan production
at $500 million annually under the program and that it expects that
three out of four mortgages in the new program would have otherwise
been backed by the FHA.
Last year, Bank of America made $1.36 billion in FHA-backed
loans, according to trade publication Inside Mortgage Finance,
making it the 22nd biggest FHA lender. The bank used to be in the
top 10.
Freddie and competitor Fannie Mae in 2014 said they would roll
out mortgages with down payments of as low as 3% to improve
mortgage availability for low-income borrowers. But because the
mortgages often cost more than FHA-backed loans, the programs had
little volume last year.
As lenders become more wary of the FHA program, lenders and
Fannie and Freddie executives said that their programs' volume
could rise.
In October, Quicken Loans, which is in the midst of FHA-related
litigation, announced a partnership with Freddie to originate more
Freddie-backed low-down-payment loans.
"Many lenders, including us, are looking at the Fannie and
Freddie programs as an alternative to the FHA," said Quicken CEO
Bill Emerson.
Bank of America says that for a borrower with a $150,000
mortgage, a credit score of 680 to 719 and a 3% down payment, the
monthly cost of the new mortgage would be about $782. A comparable
FHA borrower with Bank of America would pay $887 a month, the bank
said.
The FHA has been working for months to attempt to clarify the
liabilities lenders could face when making an FHA-backed mortgage,
including changing the certification that lenders must make in
order to limit major penalties. An FHA spokesman said that the
agency plans to unveil the final version of the certification by
the spring.
Write to Joe Light at joe.light@wsj.com
(END) Dow Jones Newswires
February 22, 2016 08:25 ET (13:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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