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JPMorgan CEO: Are FHA loans worth the risk?

The CEO of JPMorgan Chase & Co. has insinuated that his bank might stop originating Federal Housing Administration (FHA)-insured loans, highlighting a recent tendency by big banks to be more conservative about financing government-backed loans because of borrower risk and the potential for substantial regulatory penalties.  

During an earnings call last week, JPMorgan CEO James Dimon said, “The real question to me is, should we be in the FHA business at all? We’re still struggling with that.”

Dimon went on to say that the bank has lost a “tremendous sum of money” on FHA lending, referencing a recent government lawsuit that accused the bank of originating thousands of shoddy federally backed loans, most of them FHA, that it settled for $614 million.

As banks and the government seek to reinvigorate the housing market, FHA loans are often the easiest or only choice for first-time or low- to moderate-income buyers. Industry analysts say that banks are increasingly wary of FHA loans because the borrowers are sometimes more likely to default, and the government is more likely to levy bigger fines if lenders fail to meet FHA quality standards.

Until there are “safe harbors or something, we’re going to be very, very cautious in that line of business,” Dimon said, referring to FHA regulations that expose banks to major fines.

Since the housing crash, lenders have become stricter, requiring higher minimum FICO scores for FHA loans. According to CoreLogic, in 2013, borrowers with FICO scores below 640 accounted for less than 10 percent of FHA-backed loans. In 2007, 60 percent of FHA borrowers had a score below 640. 

JPMorgan is the second-largest mortgage lender in the United States. Also last week, the CEO of the bank's residential mortgage division signaled that JPMorgan would scale back financing government-backed loans.


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