Bank Watch

BofA’s new mortgage program avoids federal agency that has won big fines from banks

Bank of America has introduced a new type of home loan that underscores its pullback from making similar mortgages insured by a government agency that has won large settlements from big banks. The loan, announced this week, allows low and moderate income borrowers to make down payments of as little as 3 percent, less than the 3.5 percent minimum required for loans insured by the Federal Housing Administration.
Bank of America has introduced a new type of home loan that underscores its pullback from making similar mortgages insured by a government agency that has won large settlements from big banks. The loan, announced this week, allows low and moderate income borrowers to make down payments of as little as 3 percent, less than the 3.5 percent minimum required for loans insured by the Federal Housing Administration. Bloomberg

As recently as six years ago, Bank of America was the second-largest provider of home loans insured by the Federal Housing Administration – loans marketed mainly to low- and moderate-income borrowers.

Like other large lenders, the Charlotte bank has since pulled back from that market after agreeing to pay millions to settle FHA claims. In 2014, the bank reached an $800 million deal to resolve the agency’s allegations that it underwrote government-insured home loans for borrowers who did not qualify for them.

Now, Bank of America is introducing a type of loan that is designed for low- to moderate-income borrowers but that doesn’t require the FHA’s involvement.

Bank of America says the program, unveiled this week, will provide affordable loans to borrowers, who will also have access to counseling if they run into problems paying the mortgages back.

Experts say the move also helps the bank show it is lending to lower-income borrowers at a time when regulators are closely watching banks’ practices.

The new loans allow borrowers to make down payments of as little as 3 percent, less than the 3.5 percent minimum required for loans backed by the FHA. The new loans will also let borrowers avoid having private mortgage insurance, a product that adds costs to a mortgage but also protects lenders and investors from defaults.

Borrowers must have a minimum credit score of 660, higher than the FHA’s minimum requirement of 580.

“There is a need in today’s marketplace for more responsible mortgage products that enable creditworthy homebuyers, who meet certain income limits and other requirements, to become homeowners at an affordable entry point with comprehensive counseling,” Steve Boland, the bank’s Charlotte-based head of consumer lending, said in a statement.

Most banks have no appetite to increase their FHA lending because of perceived risks of being slapped with future fines, said Guy Cecala, CEO of industry publication Inside Mortgage Finance.

“It’s left a bad taste in their mouths,” he said.

Earlier this month, San Francisco-based Wells Fargo agreed to a $1.2 billion settlement over claims it engaged in “reckless” underwriting practices that led to thousands of federally-insured loans defaulting.

Banks have been shedding FHA market share, creating a void that’s been filled by nonbank lenders. As of the fourth quarter of last year, Bank of America ranked 22nd for its FHA lending, according to Inside Mortgage Finance. Wells Fargo, which held first place in 2010, is now second to online lender Quicken Loans.

In an interview earlier this month, Boland said Bank of America continues to make FHA loans. He attributed Bank of America’s slippage in FHA market share partly to exits the bank made from certain mortgage activities in the wake of the financial crisis.

For instance, in 2011, Bank of America announced plans to abandon its correspondent lending operation. In correspondent lending, one lender buys loans that were made by another lender.

Under a partnership agreement, Bank of America plans to sell its new mortgages to Self-Help Ventures Fund, a Durham-based nonprofit. Self-Help will then sell them to Freddie Mac, the mortgage-finance company that has been under government control since 2008. Self-Help will service the loans as well as provide the counseling services.

Bank of America says it expects to make about $500 million in the loans during the program’s first year. For all of 2015, Bank of America made more than $69 billion in first mortgages and home equity mortgages.

Cecala said the move comes as many big banks are under regulatory pressure to show they are not redlining – denying loans based on a borrower’s neighborhood.

“They can’t just focus on the jumbo (loan) market,” Cecala said. “This is just another arrow in their quiver. The more products they have like this that can cater to lower income borrowers, certainly the better (the) business practice for them."

In a 2014 report on Bank of America’s lending behavior, the Office of the Comptroller of the Currency said the bank had “excellent” distribution of loans for home purchases and home improvements to low-income borrowers.

But the bank was downgraded to a “satisfactory” rating, from “outstanding” previously, on the overall report, which measured its compliance with a 1977 law that encourages banks to meet the credit needs of the communities in which they operate. The report cited a variety of settlements, among other factors, in the downgrade.

Cecala said he’s not concerned about the future performance of Bank of America’s new loans, partly because borrowers will have access to counseling.

“Historically, loans like this, targeted loans made to lower-income borrowers, have performed very well,” he said.

Deon Roberts: 704-358-5248, @DeonERoberts

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