Nonbank lenders are cashing in on government-insured mortgages for the poor

Independent mortgage companies are making almost half of new home loans in the U.S., mirroring lending practices from the subprime crisis.

Nonbanks, more loosely regulated than large banks such as JPMorgan Chase, dominate the market for providing loans to borrowers with weak credit and lower incomes, Bloomberg reported.

These alternative mortgage providers are particularly active lenders to first-time home buyers — a segment of the market that largely relies on financing backed by government institutions including the Department of Veterans Affairs, the Department of Agriculture and the Federal Housing Administration. Nonbank debt accounts for nearly 80 percent of government-insured loans, according to the report.

Lenders use lines of credit to fund the loans, which are packaged into securities — Ginnie Mae bonds. As long as they follow the rules for writing loans, the government guarantees FHA mortgages, according to the report.

Those FHA borrowers are supposed to make small down payments, equal to 3.5 percent of the home’s purchase price, but many put nothing down and often use down payment assistance programs.

John Burns, a housing consultant based in Irvine, California, told Bloomberg that many borrowers “are living paycheck to paycheck and, if they lose their jobs, they go into default immediately.”

The Department of Justice has filed civil fraud complaints against several nonbank lenders, including Quicken Loans and Freedom Mortgage, alleging that the lenders improperly underwrote loans in the program before filing claims for government insurance.

Dana Wade, acting FHA commissioner until the Senate’s confirmation of a permanent leader, said the agency is increasingly concerned and studying the riskiness of its portfolio. With too many bad loans, the FHA could become too financially weakened to help in the next downturn, she said.

“Borrowers are stretching more,” she told the publication. “We’re concerned about it from a borrower perspective and a taxpayer perspective.” [Bloomberg] — Meenal Vamburkar