Following the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions in October 2019, JPMorgan (JPM - Free Report) is planning to restart offering mortgage loans insured by the Federal Housing Administration (“FHA”). The news was reported by Bloomberg, citing persons familiar with the matter.
The FHA provides insurance on mortgages that are originated by lenders for low-income borrowers, who otherwise would not be eligible for home loans because of their low credit scores.
JPMorgan started shrinking its FHA-backed lending operations in 2017 as “aggressive use” of the False Claims Act (FCA) made it too risky and also resulted in increased legal woes. In 2016, the company had to pay $614 million for wrongly underwriting mortgage loans and submitting the same for insurance coverage.
Apart from JPMorgan, big banks like Bank of America (BAC - Free Report) , Wells Fargo and Citigroup have coughed up more than $9 billion, in aggregate, to resolve several FCA litigations. Thus, the banks began scaling back FHA-backed lending. In fact, now the banks represent mere 15% of the total lenders that originate/provide mortgage loans to low-income borrowers, down from 45% a decade ago.
So, what’s prompting JPMorgan to resume offering FHA-backed loans?
The FHA-backed loans have a huge market. Per the HUD data, the FHA insured $215 billion in loans in 2019, representing more than 11% of mortgages issued in the country. With JPMorgan undertaking efforts to improve revenue mix, this is likely to provide some support. This will offer the company cross-selling opportunities as well.
Also, backed by an improving economy and relatively lower interest rates, if JPMorgan extends more loans to home buyers, its mortgage banking income will get some support. Though the bank’s mortgage fees and related income jumped 62% in 2019, it declined at a four-year (2016-2019) CAGR of 6.5%.
Demand for mortgage loans is already on the rise due to a decline in rates. Thus, if JPMorgan starts originating FHA-insured mortgage loans, it would help in relieving pressure on net interest margin to some extent.
Nonetheless, JPMorgan is likely to face competition from other FHA loan providers like Penny Mac Financial (PFSI - Free Report) , Flagstar Bancorp, Inc. (FBC - Free Report) and Hilltop Holdings Inc.
Shares of JPMorgan have rallied 25.2%, outperforming the industry’s rise of 17.6%.
Currently, JPMorgan carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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