NCPA - National Center for Policy Analysis

Heavy Enforcement Has Negative Effects on FHA Mortgage Market

May 12, 2015

Three factors are causing lenders to pull back on Federal Housing Administration (FHA) lending: the risk that they will be required to indemnify the FHA if a loan defaults, the high costs of servicing delinquent loans, and the significant but uncertain litigation risk associated with defaulting loans. This brief focuses on addressing the litigation factor.

The certifications the lenders are required to sign in order to do business with the FHA open them up to liability under two statutes: the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

The effect of this regime is that certifications make a good deal of sense in theory, as they align lender incentives with compliance. However, they actually create a basis upon which a False Claims Act claim can be made.

Enforcement has negative effects on access to credit. As the larger FHA lenders pulled back most aggressively, the market for FHA lenders grew less concentrated. Less concentration is typically good for a market, leading to more competition and more options for consumers. Unfortunately, that has not been the case in the FHA market.

  • Competitive pressures did not drive lenders to ease their overlays.
  • Many of the small independent nonbanks taking up the market share left behind by the larger banks are less regulated and thinly capitalized, raising the concern that they are more open to taking the risk because they have less to lose, not because they can manage it better.

Overly aggressive, unnecessary enforcement of the False Claims Act and FIRREA is constraining access to credit. The Department of Justice and HUD's inspector general could protect consumers and taxpayers by motivating lenders to improve their underwriting, not simply shut it down. We would all be much better served by their enforcement efforts if they did.

Source: Laurie Goodman, "Wielding a Heavy Enforcement Hammer Has Unintended Consequences for the FHA Mortgage Market," Urban Institute, May 2015. 


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