-backed loans – those for borrowers with credit scores as low as 580 and down payments as low as 3.5% -- after determining the disputes that often resulted were not worth pursuing this sector of business.
However, in a bid to entice banks to once again offer these loans, the Federal Housing Administration is proposing new documents that allow room for errors, while still giving the government the ability to pursue damages in the event of significant mistakes, according to the Wall Street Journal.
"In the end, we believe our efforts to expand access to credit for responsible borrowers are making a difference,” FHA Head Edward Golding said on a conference call.
According to the Wall Street Journal, suits brought by the Justice Department claiming underwriting errors have been numerous.
Some banks are wary of the proposal. Wells Fargo, the second largest FHA lender, has said it will dial back that business and become stricter with its underwriting.
“This will now force us to add back certain credit overlays on the FHA single-family program,” said Mike Heid, head of Wells Fargo Home Mortgage, according to the Journal.
Mortgage lenders reported $113 billion in FHA mortgages in the first half of the year – a 66% year-over-year spike, according to Inside Mortgage Finance. Despite this, only half of the top FHA lenders in 2013 still operate in that space due to the increase in penalties that have forced them to shy away.
For its part, Quicken Loans – the top FHA originator this year --, is reviewing the proposal.
“We haven’t seen [the Department of Housing and Urban Development] or the FHA take any real steps to improve the clarity or rules of the road under the FHA program,” CEO Bill Emerson said after the announcement of the proposal, according to the Wall Street Journal.
Many banks have pulled back from offering riskier