Last year, JPMorgan Chase CEO Jamie Dimon painted a particularly unflattering view of the mortgage business in his yearly letter to shareholders, stating that the regulatory environment and the cost of doing business was pushing the bank away from mortgage lending.
So why does Chase stay in the mortgage business? According to Dimon’s 2016 letter, the bank remains in the mortgage business for the sake of its customers. “As a bank that wants to build lifelong relationships with its customers, we want to be there for them at life’s most critical junctures,” Dimon said last year.
But this year, Dimon’s tone toward the mortgage business is much different.
In the 2017 version of his letter to shareholders, Dimon again noted the difficulty of regulatory overhang, but suggested that with some (significant) changes, the mortgage business could expand considerably in 2017 and beyond.
In the 2017 letter, Dimon writes that he recognizes that regulations needed to be added in the wake of the financial crisis, but adds that some of the rules went too far, are ill-conceived, or both.
“We had a severe financial crisis followed by needed reform, and our financial system is now stronger and more resilient as a result,” Dimon writes.
“During and since the crisis, we’ve always supported thoughtful, effective regulation, not simply more or less,” Dimon continues. “But it is an understatement to say improvements could be made. The regulatory environment is unnecessarily complex, costly and sometimes confusing.”
In Dimon’s words, “no rational person could think that everything that was done was good, fair, sensible and effective, or coherent and consistent in creating a safer and stronger system.”
Dimon states that “poorly conceived and uncoordinated regulations” damaged the country’s economy and prevented growth, which has hurt the “average American.”
Dimon writes the bank is not arguing that the Dodd-Frank Wall Street Reform Act needs to be repealed. Rather, Dimon states that changes can be made to the regulatory system to unlock hidden opportunities for the country, the financial system, and for consumers.
“We are not looking to throw out the entirety of Dodd-Frank or other rules (many of which were not specifically prescribed in Dodd-Frank). It is, however, appropriate to open up the rulebook in the light of day and rework the rules and regulations that don’t work well or are unnecessary,” Dimon writes.
“Rest assured, we will be responsibly and reasonably engaged on this front,” Dimon continues. “We believe changes can and should be made that preserve the safety and soundness of the financial system and lead to a more healthy and vibrant economy for the benefit of all.”
In the letter, Dimon lays out a series of changes to the mortgage rules that could boost mortgage lending substantially.
In Dimon’s view, the regulatory pendulum swung too far after the crisis and regulations are now inhibiting banks’ ability to lend.
“Seven major federal regulators and a long list of state and local regulators have overlapping jurisdiction on mortgage laws and wrote a plethora of new rules and regulations appropriately focused on educating and protecting customers,” Dimon writes. “While some of the rules are beneficial, many were hastily developed and layered upon existing rules without coordination or calibration as to the potential effects.”
The result of the rules, Dimon writes, is a “complex, highly risky and unpredictable operating environment” that puts lenders and servicers at higher risk of litigation and operational risk."
And those issues, in turn, affect consumers, as mortgages now cost more, mortgage credit is tighter, and private capital is limited, compared to before the crisis, Dimon writes.
“There are significant opportunities to make simple changes that can have a dramatic impact on improving the current state of the home lending industry – this will make access to good and affordable mortgages much more achievable for far more Americans,” Dimon writes.
“And it’s noteworthy that those who lost access to mortgage credit are the very ones who so many people profess to want to help – e.g., lower income buyers, first-time homebuyers, the self-employed and individuals with prior defaults who deserve another chance,” he continues.
One significant area where rules can be changed is with the Federal Housing Administration, and specifically, the government’s use of the False Claims Act to extricate settlements from lenders for supposedly misrepresenting the quality of FHA loans.
In last year’s letter, Dimon said that the bank drastically cut its FHA lending in 2015 due, in part, to the risk of a False Claims Act charge from the government.
And as Dimon writes in this year’s letter, Chase isn’t the only large lender backing away from the FHA.
Citing data from Ginnie Mae, Dimon writes that nonbanks have gone from 20% of the FHA 30-year mortgage originations in 2011 to 80% in 2016.
“The FHA plays a significant role in providing credit for first-time, low- to moderate-income and minority homebuyers,” Dimon writes. “However, aggressive use of the False Claims Act (a Civil War act passed to protect the government from intentional fraud) and overly complex regulations have made FHA lending risky and cost prohibitive for many banks.”
Dimon writes that False Claims Act settlements “wiped out a decade of FHA profitability,” adding that FHA lending is too expensive for lenders, even without the threat of a False Claims Act settlement.
“This has led us to scale back our participation in the FHA lending program in favor of less burdensome lending programs that serve the same consumer base – and we are not alone,” Dimon writes.
If the government ceased its use of the False Claims Act as a weapon, lenders would be more incentivized to increase FHA lending.
But that’s not the only change Dimon would like the FHA to make. Dimon also calls on the FHA to:
- Improve and fully implement the Department of Housing and Urban Development’s proposed defect taxonomy, clarifying liability for fraudulent activity
- Revise certification requirements to make them more commercially reasonable
- Simplify loss mitigation by allowing streamlined programs and aligning with industry standards
- Eliminate costly, unnecessary and outdated requirements that make the cost of servicing an FHA loan significantly more expensive than a conventional loan
Dimon also calls for changes to mortgage servicing rules, which could help to cut costs for servicers and borrowers alike.
“New mortgage rules and regulations total more than 14,000 pages and stand about six feet tall,” Dimon writes. “In servicing alone, there are thousands of pages of federal and state servicing rules now – clearly driving up complexity and cost.”
Dimon writes that the cost of servicing a mortgage in default has increased so much in recent years that lenders now shy away from borrowers that would have been underwritten in the past.
Dimon calls on the Department of the Treasury to install uniform, national mortgage servicing rules.
“The most promising opportunity in mortgage servicing is to adopt uniform national servicing standards across guarantors, federal and state regulators, and investors. Importantly, there is no need for legislation to implement the necessary coordination to get this done,” Dimon writes.
“In particular, the U.S. Treasury is well-positioned to lead key players in the mortgage industry (the Consumer Financial Protection Bureau, Fannie Mae, Freddie Mac, the Federal Housing Finance Agency, HUD, the FHA, the Veterans Administration, Ginnie Mae and the Department of Agriculture) to establish national service standards that would simplify mortgage origination and servicing,” Dimon continues.
If those rule changes are put in place, Dimon writes, the mortgage market could see an increase of more than $300 billion in purchase mortgage originations on a yearly basis, thanks to lower costs and an increased number of eligible borrowers.
For reference, a recent report from the Mortgage Bankers Assocation stated that there are projecte to be $1.1 trillion in purchase mortgage originations in 2017.
“If we take the actions mentioned above, we believe that the cost to a customer would be 20 basis points lower and that mortgage underwriters would be willing to take more – but appropriate – risk on loans (again, this would be for first-time, young and lower income buyers, those with prior delinquencies but who are now in good financial standing and those who are self-employed),” Dimon writes.
“Taken in total, we believe the issues identified above have reduced mortgage lending by more than $300 billion purchased mortgages annually (our analysis deliberately excludes underwriting the subprime and Alt-A mortgages that caused so many problems in the Great Recession),” Dimon continues. “Had we been able to fix these issues five years ago (i.e., three years after the crisis), our analysis shows that, conservatively, more than $1 trillion in mortgage loans might have been made.”
And, according to Dimon, if that was the case, the economy as a whole would have performed substantially better over the last few years.
“If this is true, it may explain why our housing sector has been unusually slow to recover: $1 trillion of new mortgage loans is approximately 3 million loans,” Dimon writes. “Of these, typically more than 20% would go to purchase new homes that would need to be built. By any estimate, this could have had a significant impact on the growth of jobs and gross domestic product. Our economists think that $1 trillion of loans could have increased GDP, in each of those five years, by 0.5%.”
