In his 2017 letter to the lender’s shareholders released last week, Dimon said the housing sector has been “unusually slow” to recover following the financial crisis due to restrictions in mortgage credit. He added that many rules formed after the crisis were “hastily developed” and layered upon existing rules without coordination or calibration as to the potential effects.
“The result is a complex, highly risky and unpredictable operating environment that exposes lenders and servicers to disproportionate legal liability and materially increases operational risks and costs,” he said.
Dimon said this has led to:
- Mortgages that cost the consumer more
- A tightening credit box – mortgage lenders are less likely to extend credit to borrowers without a strong credit history
- An inhibition of the return of private capital to the housing industry
- The crowding out of resources to improve technology and the customer experience
According to Dimon, Federal Housing Administration (FHA) lending has become risky and cost prohibitive for many banks due to aggressive use of the False Claims Act (FCA) and overly complex regulations.
“FCA settlements wiped out a decade of FHA profitability, and subsequent losses have kept returns on capital solidly below our target,” he said
Nonbanks have gone from about 20% to 80% of FHA originations, according to a report by Ginnie Mae cited in the letter.
“A first step to increasing participation in the FHA program could be the communication of support for only using the FCA, as originally intended, to penalize intentional fraud rather than immaterial or unintentional errors,” Dimon said.
National servicing standards
“New mortgage rules and regulations total more than 14,000 pages and stand about six feet tall,” Dimon said. “In servicing alone, there are thousands of pages of federal and state servicing rules now – clearly driving up complexity and cost.”
Dimon said the high cost of servicing a defaulted loan has prompted many servicers to avoid underwriting loans that have just a modest probability of default.
The fully loaded annual cost of industry servicing in 2015 was estimated to be $181 for a performing mortgage and $2,386 for a mortgage in default, according to the Mortgage Bankers Association.
Dimon said uniform national servicing standards would simplify mortgage origination and servicing.
“Importantly, there is no need for legislation to implement the necessary coordination to get this done,” he said.
The bank’s analysis showed that more than $1trn in mortgage loans might have been made, had the issues been fixed five years ago.
“$1 trillion of new mortgage loans is approximately 3 million loans,” Dimon said. “Of these, typically more than 20% would go to purchase new homes that would need to be built.”
The bank’s economists estimate that $1 trillion of loans could have increased GDP in each of those five years, by 0.5%, Dimon said.
“Owning a home is still the embodiment of the American Dream, and it is commonly the most important asset that most families have,” he said.
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The mortgage market could add more than $300bn a year in new purchase loans should the government take steps to reform it, according to JPMorgan Chase CEO Jamie Dimon.