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In case you missed it, Quicken Loans this month agreed to pay a token $32 million to settle a dubious housing lawsuit initiated by the Obama Justice Department. The real scandal is how the Obama Administration extracted billions from mortgage lenders for sloppy underwriting on government-insured loans while loosening loan standards and setting up taxpayers for losses.

In 2015 the Justice Department sued Quicken under the False Claims Act for originating government-insured loans that allegedly didn't comply with Federal Housing Administration standards. Justice cherry-picked about 100 of the 250,000 or so FHA-insured mortgages that Quicken made between 2007 and 2011 that ostensibly overstated borrowers' income, among other underwriting lapses.

Yet the FHA has made more in fees and premiums on Quicken mortgages than it paid out, so the government wasn't harmed. Quicken also has among the lowest default rates of all large FHA lenders. A mere 0.66 percent of its FHA-insured loans are seriously delinquent compared to the U.S. average of 1.43 percent.

Banks forked over more than $7 billion when Justice passed the offertory plate, but Quicken fought back. Federal Judge Mark Goldsmith this spring ordered the two parties to mediation after significantly narrowing Justice's claims. Although Quicken founder Dan Gilbert had said he wouldn't settle, the $32 million is less than 0.03 percent of the $108 billion in FHA loans it has made since 2007 and is a small price for avoiding a trial.

Meantime, the lawsuits have crimped the FHA's business. JP Morgan CEO Jamie Dimon noted in 2017 that False Claims Act litigation "made FHA lending risky and cost prohibitive for many banks" and "led us to scale back our participation in the FHA lending program in favor of less burdensome lending programs."

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Nineteen of the 20 top FHA lenders are now non-banks. While more lending has moved online, banks may be better situated to make loans in low-income communities where they have branches. Banks also have more credit and income data on customers that can enable them to do better underwriting.

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FHA insures mortgages with down payments as low as 3.5 percent on loans up to $727,000. The government insurer is supposed to make it easier for low-income folks to purchase a home, and its underwriting standards are lower than private insurers. But to bring in more business, the Obama Administration eased underwriting standards even more.

In 2016 the FHA rescinded a rule requiring manual underwriting for borrowers with credit scores below 620 and a debt-to-income ratio exceeding 43 percent. Non-bank lenders have since been making more and more FHA-insured loans to low-income customers for more and more expensive homes. What could go wrong?

A quarter of FHA-insured borrowers have payments that exceed half of their income — more than at the peak of the housing bubble. The average borrower credit score has declined to 670, the lowest since 2008. Santa Ana, California, last week announced $80,000 in down-payment assistance for first-time buyers.

Defaults have been declining, but that's because wages are rising while home prices have increased about 5 percent to 6 percent on average for the last five years. If the economy and home prices take a turn for the worse, FHA's 2.8 percent capital cushion might not cover losses and taxpayers could wind up as the backstop.

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— The Wall Street Journal

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