Author Archives: nottoobigtofail.org

“Having spent a lot of money and a half-dozen years of my life defending myself against meritless federal (both private and government) civil litigation and dealing with several federal judges and the 9th Circuit and reading a lot about it, it is clear to me that the judicial branch of our government is in serious need of reform…

…In particular, with lifetime appointments, there is almost no judicial accountability at the federal level. In the federal system, no matter how many times a judge’s decisions are overturned by a higher court, they are allowed to remain on the bench and to continue to incorrectly interpret laws and/or the Constitution and therefore improperly abuse American individuals and institutions. It seems to me there should be a simple rule for federal judges. If you have more than let’s say ten of your rulings overturned by a higher court, then your lifetime appointment is revoked and you are off the bench! Something like that makes sense to me and would eliminate a lot of the personal and political bias in rulings. By the way, in this day an age, with the complexity of our laws, economy, and our Country, it makes no sense that federal judges remain “Generalists”. Unbelievably, each federal judge continues to handle all manner of civil and criminal cases…lack of specialization/knowledge I believe is the second reason for judicial error (the first I believe is political or personal bias). p.s. I think President Trump has had similar experiences and so appropriately doesn’t respect individual federal judges and certain appeals courts and I am glad he is using The Bully Pulpit to draw attention to this serious problem that the legal profession seems almost blind to. Think about it….The Supreme Court spends all its time on legal rulings and NO TIME managing and holding the lower courts and judges to account!”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Here’s some good news, unless you work for the SEC. The U.S. Securities and Exchange Commission dropped the last two remaining civil fraud charges in a long-running federal case against Larry Goldstone and Clarence Simmons, former executives of Santa Fe-based Thornburg Mortgage…

…This has been going on for nearly eight years since the firm went bankrupt in 2009. Remember that last June a U.S. District Court jury in Albuquerque found in favor of the two Santa Fe residents on five fraud counts and failed to reach a verdict on five other charges, including the central claim that the men had filed a false financial statement inflating the company’s income. And the SEC dropped three of those charges in September, and a retrial for two final charges was set to begin later this month – one claim that Goldstone and Simmons had misrepresented information to auditors, and an additional claim against Goldstone that he had made a false statement to investors. Goldstone, the firm’s former CEO, and Simmons, the former chief financial officer, were accused by the SEC in March 2012, along with chief accounting officer Jane Starrett, of trying to hide the company’s deteriorating financial condition, including an allegation that they schemed to overstate the company’s income by more than $420 million in 2007. The SEC began investigating the case in 2008.”, Excerpt from February 6, 2017 Mortgage Industry Newsletter

“Once again, the government’s false narrative “that greedy and reckless bankers caused the financial crisis by fraudulently forcing people to take out mortgage loans and then lying (using fraudulent securities disclosures) to sophisticated investors, so they could sell/securitize them” is not proven (despite the very low, legal bar required to prove civil securities fraud) and to my knowledge has never been proven. It has never been proven, because it is just not true. It is a false, political, liberal, anti business, anti American narrative…..just like the false liberal narrative about cops or the false liberal narrative that President Bush lied about WMD’s and got us into the Iraq War. p.s. Think about how long these Thornburg guys had to fight these serious civil allegations? Talk about cruel and unusual punishment and being deprived of their Life, Liberty and Pursuit of Happiness for years! This is exactly why my attorneys advised me to settle with the un-American and abusive Obama SEC, with no admission of wrongdoing, on one B.S. allegation…to be done and have the SEC agree to accept all the Court’s decisions for me, without appeal.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Multiply the cases of Messrs. Childs and Pilger by a few thousand and you have the runaway administrative state. Sad to say, the government has no trouble finding Americans happy to do this work-happy to treat everyone in the private economy as a criminal…

…No wonder many business people, having seen the last of the Obama administration, now pray a new president will mean a new era of hope and change.”, Holman W. Jenkins, Jr., “Meet the Victims of the Administrative State”, The Wall Street Journal, January 30, 2017

Opinion

Meet the Victims of the Administrative State

Multiply these two cases thousands of times over and you can understand America’s doldrums.

By Holman W. Jenkins, Jr.

Usually in the run-up to a presidential election, or soon thereafter, a column appears in this space pointing out that an important part of every president’s job is protecting America from Washington. Barack Obama did not embrace this presidential duty. Maybe Donald Trump will.

John W. Childs runs a highly reputed Boston private-equity firm that Dodd-Frank placed under the jurisdiction of the Securities and Exchange Commission, which demanded a list of campaign donations.

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PHOTO: ISTOCK/GETTY IMAGES

Lo, in 2013, one partner gave $250 to a Boston mayoral candidate who didn’t get past the Democratic primary. Ten years earlier, the city of Boston had invested in the firm’s fund.

“I’m not in favor of bribery,” says Mr. Childs, though he wonders how a donation today can influence an investment decision made by somebody else a decade earlier.

Never mind. He agreed to a settlement and a fine of $35,000 under “pay to play” rules, but then the SEC demanded he also accept “censure” of his firm. “Censure,” to him, sounded like “evildoing capitalists” admitting to “something egregiously wrong,” so the normally publicity-shy Mr. Childs drew a line.

In a wholly uneconomic decision, his firm has decided to fight. “I’m fortunate that I can afford to do this,” he says. Stay tuned, because his battle potentially has First Amendment implications.

Which brings us to case No. 2.

David Pilger and his late brother, William, for 40 years operated a Miami-based dry-cleaning supply and export business, which itself has been around for 82 years. Looking for a way to retire while taking care of their employees, the brothers decided to transfer ownership to an ESOP—an employee stock ownership plan.

Through the ESOP Association, they found an adviser to fill out the Labor Department paperwork. They hired RSM McGladrey, a global accountancy, to render an opinion on what the firm was worth. The result—a bit more than $9 million, after being reduced for a “lack of marketability”—left them unthrilled. But this was the trough of the great recession and they went ahead.

At first they lined up a bank but then chose to finance the deal themselves with a 4% (later reduced to 1.4%) promissory note. This is important: If you’re dumping a business on an ESOP at an inflated price, you want a bank to take the risk while you make off with the loot.

Commodity Control Corp., their company, appears to have exceptionally good relations with its 45 employees, many of whom have been around for decades. Every year, the company sponsors a three-day cruise to hand out employee awards and hold training sessions on hazmat, driver safety, sexual harassment, etc.

The firm had reliably generated profits of $700,000 a year on sales of $14 million—and lately closer to $1 million, adds the affable Mr. Pilger, since the “grossly overpaid” brothers replaced themselves with professional managers.

The company has no bank debt. Virtually every year the firm makes the maximum allowable contribution, 25% of payroll, to the ESOP trust.

Enrique Padron, who now runs the company and came aboard after the deal, says he and his employees have seen no reason to complain about the ESOP terms. “It’s been a great opportunity for them to get ownership in the company and save for retirement,” he says.

Alas, the government does not launch investigations except for the purpose of finding something. Eight years after the fact, the Labor Department now says the ESOP was overvalued, demanding the return of all funds received by the Pilgers, plus a potential 20% penalty.

How did they become a target? Not because of any complaint. The agency chose as a matter of policy to investigate leveraged ESOPs, and Mr. Pilger’s was the only one available to be investigated by the department’s Atlanta regional office. At first, he didn’t hire a lawyer and voluntarily signed a tolling agreement to extend the statute of limitations. “I thought they’d investigate and hand me a commendation for making owners out of my employees,” he tells me.

Now let it be said that ESOPs are created by government, promoted by government, showered with government tax benefits, and ripe for abuse. But this does not appear to be one of those cases—unlike, say, the disastrous ESOP of the Chicago Tribune company around the same time, whose egregiousness anybody could see from five miles off.

Rather, we have here a question of dueling valuations, with the Labor Department’s figure influenced by the subsequent Obama era’s miserableness for small business. Recall that the Pilgers themselves are financing the transaction. In essence, they are buying the company from themselves with the company’s now-tax-privileged cash flow and, at the same time, gifting shares to the employees. What matters is that they aren’t taking out cash at an unsustainable rate.

Multiply the cases of Messrs. Childs and Pilger by a few thousand and you have the runaway administrative state. Sad to say, the government has no trouble finding Americans happy to do this work—happy to treat everyone in the private economy as a criminal. No wonder many business people, having seen the last of the Obama administration, now pray a new president will mean a new era of hope and change.

“The idea that federal courts are required by law (Chevron Deference), to take the side of an often highly-politicized federal administrative agency (like the SEC, FDIC, etc.) over individual citizens and private institutions…

…in their interpretation their own often vague and arbitrary regulations, is un-American and un-Constitutional, and is just like the dystopian world described in George Orwell’s novel “1984”. So glad to see the Republicans in Congress take up this matter and try and eliminate it. While they are at it, they should fix two other matters.  First, government officials, whether elected or appointed, should not be protected by sovereign immunity, when they libel or slander individual American citizens. Second, in civil matters, plaintiffs lawyers are protected by law from their lies, misstatements (intentional or not), omissions, distortions, biases, and lack of fact-checking, made in their allegations within the four-corners of a lawsuit. Given this well-know fact, the press/media should not be protected from libel and slander lawsuits, where they regurgitate allegations from civil lawsuits (even ones filed by governments or their agencies), without any independent verification of the often blatantly false allegations made.”, Mike Perry, former Chairman and CEO, IndyMac Bank

https://www.nytimes.com/2016/06/23/opinion/the-supreme-courts-post-scalia-term.html?_r=0

“This is wrong on so many levels. Fannie Mae, still in government conservatorship since 2008 (when they and Freddie Mac were bailed out by taxpayers to the tune of $190 billion), is going to guarantee (a taxpayer guarantee!!!) huge Wall Street firm Blackstone’s debt secured by rental homes…

…so they can issue it at cheaper rates, so they can outbid individual Americans who might otherwise buy these homes at a lower price! They can’t be privatized because they require the government/taxpayer guarantee (implicit or explicit) to issue cheap debt (U.S. Treasury-like) and mortgage guarantees, and make any profit. Wake up folks, did we learn nothing? Fannie and Freddie need to be shut down.”, Mike Perry, Former Chairman and CEO, IndyMac Bank

Ryan Dezember and Nick Timiraos, January 24, 2017, The Wall Street Journal

Markets

Blackstone Wins Fannie’s Backing for Rental Home Debt

Agreement announced in a filing made by Blackstone unit Invitation Homes ahead of its IPO

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Fannie Mae headquarters in Washington, D.C. PHOTO: MANUEL BALCE CENETA/ASSOCIATED PRESS

By Ryan Dezember and Nick Timiraos

Fannie Mae is backing debt from Blackstone Group LP’s investment in single-family homes, offering an important endorsement to Wall Street’s expanding business of owning and renting houses.

The government-controlled mortgage-finance company said it would guarantee up to $1 billion in debt from Blackstone’s Invitation Homes Inc., which owns the country’s largest pool of rental homes.

The deal was disclosed as Invitation began pitching investors on its shares this week with an initial public offering expected as soon as next week. Invitation’s stock-market debut could be the largest U.S. IPO since October 2015, if the shares price in the middle of their expected range, raising about $1.5 billion for the company.

Fannie Mae’s involvement signals a belief that homeownership will remain out of reach for many Americans. Homeownership has declined since the housing crisis amid stricter lending standards, mounting student debt, and potential buyers whose savings and credit diminished during the recession. Last year, the homeownership rate reached its lowest level in at least 50 years, according to U.S. Census Bureau data.

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Fannie’s guarantee also suggests a view that Wall Street’s housing wager is a long-term business, not just an opportunistic trade made after the foreclosure crisis.

For Fannie and its smaller government-controlled peer, Freddie Mac, the expansion into the nascent single-family rental market shows both the potential for the companies to expand their role in a changing housing market and, in the process, to institutionalize new investment classes. Both companies have long provided funding to the apartment sector, including luxury rental buildings owned by publicly traded real-estate investment trusts and other institutional owners.

For years, policy makers in Washington talked of overhauling the firms, but the expansion into a new asset class illustrates how the companies have broadened their utility to the market as efforts to replace the companies has stalled.

Fannie’s latest move represents a shift from about four years ago, when regulators blocked Freddie from backing bulk buyers of foreclosed homes, concerned banks wouldn’t be able to compete with its cheap debt.

Fannie’s support will likely make it cheaper for buyers like Blackstone to add homes in the future as its guarantee of payment makes the debt less risky for investors than the rental-backed bonds that Invitation and its rivals sold amid a dearth of financing for home purchases after the housing meltdown.

“The question is, to what extent does the cheaper financing that accompanies Fannie’s guarantee result in greater competition for single-family homes?” said Heidi Learner, chief economist at real-estate brokerage Savills Studley. She said the agreement “is essentially a sign that individual homeownership is no longer a government priority.”

A Blackstone spokeswoman declined to comment. Invitation representatives didn’t respond to requests for comment.

“This transaction helps us gather data and test the market to ensure we are delivering the right solutions that meet the increasing demand for single-family rental housing across all demographics,” Fannie Mae told The Wall Street Journal.

Big investors’ bet on single-family homes comes with risks. Competition from individual buyers could drive up home prices, which are already rising. Many of Wall Street’s new purchases are being made on the open market now that foreclosure rates have returned to normal levels. Wider availability of credit and a boom in home building could also hurt the business of Invitation and its rivals.

Invitation said in an IPO filing that it secured commitments from Wells Fargo & Co. and Fannie on a 10-year loan secured by some of its 48,431 homes. Invitation, which is based in Dallas and owns properties in 13 metropolitan markets, said it would use the loan proceeds to repay older debt.

That debt was raised by selling short-term bonds backed by rental revenue from bundles of specific homes. Invitation was the first to sell such bonds in 2013 and has been a major issuer since. In all, big investors have sold about $18.3 billion of rental-backed bonds, with about $16.8 billion of such debt outstanding, according to Kroll Bond Rating Agency Inc.

Fannie and Freddie don’t issue mortgages. Rather, they buy mortgages issued by banks, bundle them and sell the debt, which they guarantee against default, to investors. Since 2008, they have been controlled by the U.S. government through a process known as conservatorship when the foreclosure crisis prompted concerns that they might fail and intensify the financial panic.

In 2012, the entities’ regulator, the Federal Housing Finance Agency, blocked Freddie from financing investors who were buying foreclosed homes in bulk amid concerns that Freddie’s cheap debt would make it difficult for banks to compete on loans to the increasing number of investors gobbling up foreclosed homes.

Much has changed since then. Beside the advent of the rental-backed bond market, two Invitation rivals— American Homes 4 Rent and Colony Starwood Homes, the country’s second- and third-largest single-family homeowners, respectively—have gone public. Also, home prices have rebounded.

Fannie has long backstopped loans to the mom-and-pop landlords that have traditionally dominated the rental-home business.

On a call Monday with investors and Green Street Advisors LLC analysts, Donald Mullen Jr., a former Goldman Sachs Group Inc. executive whose Pretium Partners LLC backs Progress Residential, owner of the fourth-largest pool of U.S. rental homes, said Fannie’s agreement with Invitation is overdue and should put to rest skepticism over the staying power of the institutional rental-home business.

Lately, Mr. Mullen has been soliciting investors for $1 billion to buy more houses to add to the 20,000 Progress already owns, The Wall Street Journal has reported.

“This is a great outcome not just because it obviously will reduce the cost of our financing, but it puts a further stamp of approval on this industry,” Mr. Mullen, who a decade ago oversaw Goldman’s lucrative bet against the housing market, known as “the big short,” said Monday.

“Washington’s many agencies, bureaus and departments propagate rules that weigh down businesses, destroy jobs, and limit American freedoms. Career bureaucrats who never face the voters wield punishing authority with little to no accountability…

…If there’s a swamp in Washington, this is it. Faced with a metastasizing bureaucracy, the House is undertaking structural and specific reform to offer the nation a shot at reviving the economy, restoring the Constitution, and improving government accountability, all at once. The plan to strip power from the bureaucracy and give it back to the people has two steps. First, we began structural reform by passing the REINS Act, an acronym for Regulations From the Executive in Need of Scrutiny. If the bill becomes law, new regulations that cost $100 million or more will require congressional approval before they take effect. The House also passed the Regulatory Accountability Act, which would require agencies to choose the least-costly option available to accomplish their goals. That bill would also prohibit large rules from going into effect while they are being challenged in court…..Further, it would end “ Chevron deference,” a doctrine that stacks the legal system in favor of the bureaucracy by directing judges to defer to an agency’s interpretation of its own rules.”, House Majority Leader, Republican Kevin McCarthy, “How the House Will Roll Back Washington’s Rule by Bureaucrats”, The Wall Street Journal, January 25, 2017

“Fabulous and would never have happened with the liberal Democrats, who are destroying our Country from within, in charge. p.s. I dealt first hand with this un-Constitutional and un-American bureaucracy, at both the SEC and FDIC, when my bank failed in the 2008 financial crisis. I also dealt with this ridiculous and un-Constitutional Chevron Rule!”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

How the House Will Roll Back Washington’s Rule by Bureaucrat

We passed legislation to tighten the reins on federal agencies and will soon nix new Obama regulations.

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PHOTO: DE AGOSTINI/GETTY IMAGES

By Kevin McCarthy

When President Trump delivered his inaugural address last week, he declared that “we are transferring power from Washington, D.C., and giving it back to you, the people.” Note that he said we are transferring power, in the present tense. The House has already begun turning the president’s words into reality by targeting the part of Washington that poses the greatest threat to America’s people, economy and Constitution: the federal bureaucracy.

Washington’s many agencies, bureaus and departments propagate rules that weigh down businesses, destroy jobs, and limit American freedoms. Career bureaucrats who never face the voters wield punishing authority with little to no accountability. If there’s a swamp in Washington, this is it.

In President Obama’s final year the Federal Register hit 97,110 pages—longer by nearly 18,000 pages, or 15 King James Bibles, than in 2008. Federal regulations cost the American people about $1.89 trillion every year, according to an estimate by the Competitive Enterprise Institute. That’s more than 10% of GDP, or roughly $15,000 per American household. The Obama administration has also burdened the public with nearly 583 million hours of compliance over the past eight years, according to the American Action Forum. That’s averages to nearly five hours of paperwork for every full-time employee in the country.

Faced with a metastasizing bureaucracy, the House is undertaking structural and specific reform to offer the nation a shot at reviving the economy, restoring the Constitution, and improving government accountability, all at once. The plan to strip power from the bureaucracy and give it back to the people has two steps.

First, we began structural reform by passing the REINS Act, an acronym for Regulations From the Executive in Need of Scrutiny. If the bill becomes law, new regulations that cost $100 million or more will require congressional approval before they take effect. The House also passed the Regulatory Accountability Act, which would require agencies to choose the least-costly option available to accomplish their goals. That bill would also prohibit large rules from going into effect while they are being challenged in court. Further, it would end “ Chevron deference,” a doctrine that stacks the legal system in favor of the bureaucracy by directing judges to defer to an agency’s interpretation of its own rules.

Second, the House next week will begin repealing specific regulations using the Congressional Review Act, which allows a majority in the House and Senate to overturn any rules finalized in the past 60 legislative days.

Perhaps no aspect of America’s economy has been as overregulated as energy. So the House will repeal the Interior Department’s Stream Protection Rule, which could destroy tens of thousands of mining jobs and put up to 64% of the country’s coal reserves off limits, according to the National Mining Association.

Likewise, the Obama administration moved at the 11th hour to limit the oil-and-gas industry through a new methane regulation. It could cost up to $1 billion by 2025, the American Petroleum Institute estimates, even though the industry is already subject to the Clean Air Act and has leveraged technological advances to dramatically reduce methane emissions. The additional regulation would force small and struggling operations—in the West in particular—to close up shop, which is why it will be one of the first to go.

The House will also take the ax to the Securities and Exchange Commission’s disclosure rule for resource extraction, which adds an unreasonable compliance burden on American energy companies that isn’t applied to their foreign competitors. This rule, which closely mimics a regulation already struck down by the courts, would put American businesses at a competitive disadvantage.

The bureaucracy under President Obama has also threatened America’s constitutional rights. A new rule from the Social Security Administration would increase scrutiny on up to 4.2 million disabled Americans if they attempt to purchase firearms. This would elevate the Social Security Administration to the position of an illegitimate arbiter of the Second Amendment. And in an affront to basic due process, the bureaucracy has attempted to blacklist from federal contracts any business accused of violating labor laws—before the company even has a chance to defend itself in court.

With President Trump’s signature, every one of these regulations will be overturned. In the weeks to come, the House and Senate will use the Congressional Review Act to repeal as many job-killing and ill-conceived regulations as possible. That’s how to protect American workers and businesses, defend the Constitution, and turn words into actions.

Mr. McCarthy, a California Republican, is the House majority leader.

“Mr. Gilbert (CEO of Quicken Loans) said that his company has been unfairly targeted. “You want to know what this case is about?” he said. “Somebody probably put up a whiteboard and said, ‘Here are the 10 largest F.H.A. lenders, now go and collect settlements from them, regardless of whether they did anything wrong.’”…

…In court documents, Quicken argues it has the lowest default rates in the F.H.A. program. It projects the government will reap $5.7 billion in net profits from the insurance premiums for loans made from 2007 to 2013, after paying out any claims. These days, Mr. Gilbert appears to be itching for a fight with the Justice Department. In court filings, Quicken argued that the three-year government investigation was based on 55 “cherry-picked” loans out of nearly 250,000. Quicken also argued that a longstanding F.H.A. process to resolve loans that did not meet its requirements, through either the repurchase of the loan or by indemnifying F.H.A. from any losses, was retroactively discontinued for Quicken….In September 2012, banks originated 65 percent of the purchase-mortgage loans insured by the F.H.A., according to the data. Today, that number has more than flipped: Nonbanks originate 73 percent of the loans, with banks’ share dropping to 18 percent. The figures are more spectacular for refinanced mortgages, where nonbanks now make up 93 percent of loans…..“The market has moved to the nonbanks because the nonbanks’ appetite for risk is much higher,” said Edward J. Pinto, a director of the Center on Housing Risk. He has argued that the F.H.A. is not only failing to help low-income communities with its programs, but is actually weakening them with imprudent loans.”, “The New Mortgage Machine”, Julie Creswell, The New York Times, January 22, 2017

“I agree with Quicken and its CEO and also the AEI’s Edward Pinto, with respect to the risk of the FHA program and why the major banks have ceded this market to non-bank mortgage lenders. FHA loans (with 3.5% down to subprime credit scores as low as 580) only work when home prices are rising and the economy is solid. In other times, they are as big a risk to the borrowers, as they are to the American taxpayer.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Quicken Loans, the New Mortgage Machine

By JULIE CRESWELL

DETROIT — A low buzz fills the air as an army of mortgage bankers, perched below floating canopies in a kaleidoscope of vivid pinks, blues, purples and greens, works the phones, promising borrowers easy financing and low rates for home loans.

By the elevators, nobody blinks when an employee wearing a pink tutu bustles past. On any given day, a company mascot, Simon, a bespectacled mouse, goes on the hunt for “gouda,” or good ideas, from the work force.

A visit to the headquarters of Quicken Loans in downtown Detroit may seem like a trip to a place where “Glengarry Glen Ross” meets Seussville. But the whimsical, irreverent atmosphere sits atop a fast-growing business in a field — the selling of the American dream — that has changed drastically since an earlier generation of mortgage lenders propelled the economy to near collapse in 2008 by issuing risky and even fraudulent loans.

In the years since the crisis, many of the nation’s largest banks pulled back their mortgage-lending activities. Quicken Loans pushed in. Today, it is the second-largest retail mortgage lender, originating $96 billion in mortgages last year — an eightfold increase from 2008.

Privately held Quicken, like some of America’s largest banks before it, has also landed in regulators’ cross hairs. In a federal false-claims lawsuit filed in 2015, the Department of Justice charged that, among other things, the company misrepresented borrowers’ income or credit scores, or inflated appraisals, in order to qualify for Federal Housing Administration insurance. As a result, when those loans soured, the government says that taxpayers — not Quicken loans — suffered millions of dollars in losses.

Quicken Loans today is the F.H.A. insurance program’s largest participant.

Executives at Quicken Loans deny the charges, maintaining, among other things, that the government “cherry-picked” a small number of examples to build its case. In an aggressive move, the company pre-emptively sued the Department of Justice, demanding a blanket ruling that all of the loans it had originated met requirements and “pose no undue risks to the F.H.A. insurance fund.”

Quicken’s suit was dismissed. But it reflects the in-your-face style of Quicken Loans’ founder and chairman, Dan Gilbert, the billionaire who once publicly excoriated the N.B.A. superstar LeBron Jamesfor leaving the Cleveland Cavaliers, in which Mr. Gilbert has a majority stake. He also owns significant chunks of central Detroit, where Quicken Loans is based.

Mr. Gilbert, who founded the company in 1985, sold it to the business software company Intuit in 1999, before buying it back with other investors in 2002.

He is working to rectify the city’s downtrodden image with streetcars, upscale cafes and boutiques, and fiber-optic data, making him a hometown hero. Late last year, Quicken Loans won a motion to move the Department of Justice case to a federal courthouse roughly three blocks from its Detroit headquarters.

Sitting on the edge of a chair in his office, the Motor City’s skyline a steel gray in the late-afternoon November sun, Mr. Gilbert said that his company has been unfairly targeted. “You want to know what this case is about?” he said. “Somebody probably put up a whiteboard and said, ‘Here are the 10 largest F.H.A. lenders, now go and collect settlements from them, regardless of whether they did anything wrong.’”

In court documents, Quicken argues it has the lowest default rates in the F.H.A. program. It projects the government will reap $5.7 billion in net profits from the insurance premiums for loans made from 2007 to 2013, after paying out any claims.

A spokesman for the Department of Housing and Urban Development, which is home to the F.H.A. program at the center of the case against Quicken, declined to speak about the lawsuit.

Late last year, Donald J. Trump named a former Quicken Loans lobbyist, Shawn Krause, to his H.U.D. transition team. A Trump spokeswoman did not respond to an email asking about potential conflicts of interest. In an emailed statement, Quicken Loans said the fact that Ms. Krause had come from the largest F.H.A. lender in the country “bodes well for the positive impact she has, and will, make on H.U.D.”

In the years since the financial crisis, Quicken has emerged as a leader in the nation’s shadow-banking system, a network of nonbank financial institutions that has gained significant ground against its more heavily regulated bank counterparts in providing home loans to Americans. Increased regulation and decreased profits sent the nation’s banks packing.

Nonbanks, like Quicken, have filled that gap. Today, Quicken is the nation’s second-largest retail residential mortgage lender, behind Wells Fargo, but ahead of banking giants like J. P. Morgan, Bank of America and Citigroup, according to Mortgage Daily.

Considered by many to be a visionary leader, Mr. Gilbert often strikes a pugnacious stance. When Mr. James, the N.B.A. star, announced he was leaving the Cleveland Cavaliers in 2010 to join the Miami Heat, Mr. Gilbert — who not only has a majority stake in the Cavaliers, but also operates Quicken Loans Arena, where they play — penned a public tirade against the “cowardly betrayal,” in a letter written in the typeface Comic Sans.

Mr. James is again playing for the Cavaliers. A call to his agent seeking comment was not returned.

The year before, Mr. Gilbert got into an altercation at a bar mitzvah, punching a former colleague, David Hall, in the head before he was escorted out by security, according to interviews conducted by the Birmingham Police Department in Michigan. In police documents, Mr. Gilbert’s lawyer said Mr. Hall filed the complaint in order to pressure Mr. Gilbert into paying $2 million to buy out Mr. Hall’s investments in Mr. Gilbert’s companies. The Birmingham city attorney ultimately denied a warrant in the case on the grounds that the charges were not “supported by probable cause.”

Mr. Hall did not return an email seeking comment. In an email statement, a Quicken Loans spokesman said Mr. Gilbert “defended himself in a minor confrontation that was instigated by a former employee who was the aggressor.”

On a more trifling scale, after sending text messages about this article to a reporter at The New York Times but not receiving a response — Mr. Gilbert was texting her landline number by accident — he followed up with an email accusing the reporter of disconnecting her mobile phone to avoid him. The phone “likely is one of your temporary numbers that you deploy for the surreptitious work that you do,” he wrote.

When alerted to the misunderstanding, Mr. Gilbert apologized “for any of it that was caused on my end.”

When Mr. Gilbert was asked in an email if he “often strikes a ‘combative stance’ or ‘frequently attacks his critics,’” a Quicken Loans spokesman responded in an email, “It’s interesting that when someone with as long and successful career as Mr. Gilbert is forced to defend his integrity and honor from old and/or insignificant already rehashed incidents and accusations from a media source as credible as The NY Times, you would imply that doing such is ‘frequently attacking’ his critics.”

These days, Mr. Gilbert appears to be itching for a fight with the Justice Department. In court filings, Quicken argued that the three-year government investigation was based on 55 “cherry-picked” loans out of nearly 250,000.

Quicken also argued that a longstanding F.H.A. process to resolve loans that did not meet its requirements, through either the repurchase of the loan or by indemnifying F.H.A. from any losses, was retroactively discontinued for Quicken.

Since 2011, Mr. Gilbert has spent more than $2.2 billion on downtown Detroit, buying up 95 decrepit properties and rehabilitating them in an effort to lure new tenants. Nike opened a store there last year. The New York burger chain Shake Shack is coming in 2017, as is the sports retailer Under Armour. Mr. Gilbert also notes that he has leased space downtown to several local minority-owned start-up businesses.

That sort of presence makes downtown Detroit today seem a bit like a company town, a sort of Quickenville. That’s because Quicken Loans is just one of more than 100 closely knit companies that is owned or controlled by Mr. Gilbert with a footprint in the area. Through his commercial real estate properties, Mr. Gilbert can decide which tenants fit into his vision for downtown Detroit, and which don’t.

Rocket Fiber, an idea developed by three former Quicken Loans technology employees and financially backed by Mr. Gilbert, has brought high-speed internet to downtown Detroit. For a $15 million donation, Quicken received the naming rights for the QLine, a streetcar that is expected to start running through downtown Detroit this spring. Mr. Gilbert sits on the board of the streetcar project.

Lines of bicycles in downtown Detroit are available free for all employees of Mr. Gilbert’s companies. And visitors can bet at the tables at Jack Detroit Casino-Hotel Greektown, a gambling venture controlled by Mr. Gilbert.

The Quicken Loans family also includes one of the largest title companies in the United States, an appraisal firm, a call center and In-House Realty, which says on its website that it is the “preferred real estate partner” of Quicken Loans.

Mr. Gilbert, who was busted in college for running a football betting ring (the charges were dismissed and his record was expunged), plays on a big stage. Back in 2010, he guaranteed that the Cavaliers would win the N.B.A. championship before LeBron James would. They didn’t, but the team, led by Mr. James, did win the title last year, and this season’s team has the highest payroll in the league.

With Quicken Loans, Mr. Gilbert has built a game-changing company in the once-staid mortgage-lending industry.

Former executives describe Quicken Loans as a technology company that sells mortgages. But the heart that keeps Quicken’s blood moving is the 3,500 mortgage bankers who work its phones. Many new employees come in with little to no background in financial services. One employee joined after delivering pizzas to the Quicken Loans office and becoming interested in working there.

Entry-level employees typically make hundreds of calls a day, trying to get potential customers on the phone. Not unlike the assembly lines that put together cars in Detroit, the call is immediately handed off to a licensed mortgage banker, who completes the loan application, then quickly passes it to processing so that he or she can focus on the next loan application.

Mr. Gilbert said clients are able to close more quickly on loans when specialists focus on each stage of the loan process. He and other Quicken executives note that the company has repeatedly made Fortune magazine’s list of Best Places to Work For and has earned top marks in J. D. Power client satisfaction surveys.

Quicken defines its culture and philosophy through a number of so-called “isms,” created and curated over the years by Mr. Gilbert: “Yes before no.” “A penny saved is a penny.” “We eat our own dog food.”

At the same time, several former employees and executives in interviews described a demanding work environment, with staff members expected to work long hours and weekends to hit targets. In recent years, Quicken and its affiliated companies have faced at least four lawsuits filed by former mortgage bankers seeking overtime.

Quicken won one of the overtime cases, but court documents indicate others were directed into settlement negotiations. An email to the various plaintiffs’ lawyers was not returned.

And in early 2016, a National Labor Relations Board judge ruled that Quicken and five of its related companies issued an employee handbook with rules that violated workers’ right to engage in various activities, including union-related ones. Quicken has appealed the ruling, calling the policies “common, rational and sensible.”

When asked about criticisms of the work environment, Mr. Gilbert and other executives defended the company, noting that mortgage bankers work an average of 44 hours per week and are compensated well. It is possible for team members, Mr. Gilbert said, to earn over $85,000 in their second year, more than double the median household income for Wayne County, Mich.

Quicken Loans’ growing role in parts of the mortgage market may make it a lightning rod for critics.

Proponents say that nonbanks like Quicken or PennyMac in California — which was started by former executives of Countrywide, the mortgage machine in Southern California that was a hotbed of toxic mortgages in the 2008 crisis — are filling an important void. They argue that they serve people with low to moderate incomes or lower credit scores whom the big banks shun. The big banks, they say, focus instead on so-called jumbo mortgages, or mortgages of more than $424,100, the maximum amount that can be backed by government-sponsored enterprises like Fannie Mae and Freddie Mac.

“The large banks want to go after the higher-end business,” said Guy D. Cecala, the chief executive and publisher of Inside Mortgage Finance.

Thanks to low interest rates, home sales are booming and the mortgage market was expected to top $2 trillion in originations in 2016. That’s a far cry from the frothy height of $3.8 trillion that was hit in 2003.

Moreover, many other parts of the mortgage machine that were in place leading up to the financial crisis have been dismantled.

Still, critics say today’s shadow banks, by focusing on the riskier end of the mortgage market, may be revving up the same parts of the engine that resulted in defaults and foreclosures in the past. Nonbanks, which are typically less capitalized and may have more difficulty reimbursing the government for bad loans, now dominate F.H.A.-insured mortgage loans, according to data from the American Enterprise Institute’s International Center on Housing Risk.

In September 2012, banks originated 65 percent of the purchase-mortgage loans insured by the F.H.A., according to the data. Today, that number has more than flipped: Nonbanks originate 73 percent of the loans, with banks’ share dropping to 18 percent.

The figures are more spectacular for refinanced mortgages, where nonbanks now make up 93 percent of loans.

“The market has moved to the nonbanks because the nonbanks’ appetite for risk is much higher,” said Edward J. Pinto, a director of the Center on Housing Risk. He has argued that the F.H.A. is not only failing to help low-income communities with its programs, but is actually weakening them with imprudent loans.

Mr. Gilbert disputed any “false narrative” that claims Quicken faces less regulatory scrutiny, is lightly capitalized or makes risky loans. He said that the average credit score of a Quicken borrower is one of the highest in the nation; that the parent company’s assets “are larger than that of 93 percent of all F.D.I.C.-insured depositories”; and that the company is regulated by 50 states, multiple municipalities and numerous federal agencies. Quicken Loans is privately held, and it is unclear what its assets are worth.

In an email response to follow-up questions, Mr. Gilbert added, “Quicken Loans underwriting and production is one of the highest, if not the highest, quality production in the entire country.”

Correction: January 21, 2017

An earlier version of this article misstated Dan Gilbert’s position at Quicken Loans. He is the founder and chairman, not the chief executive. A summary of the article repeated the error.

The earlier version of the article also incompletely described the company’s history. Mr. Gilbert founded the company in 1985, sold it to Intuit in 1999 and then bought it back with other investors in 2002. It was not simply that he and other investors bought Quicken from Intuit in 2002.

A version of this article appears in print on January 22, 2017, on Page BU1 of the New York edition with the headline: The New Mortgage Machine.

“The Troubled Asset Relief Program may have been the least of the rescue measures, but it was the highest risk, because the people’s bipartisan representatives were required to put their imprimatur on unpopular bailouts…

…Nonetheless, TARP was enacted Oct. 3, 2008, almost four months before President Obama took office. On March 16, 2008, the Federal Reserve arranged a fire sale of Bear Stearns. Between Sept. 19 and Oct. 26, numerous other institutions were bailed out; the money-fund industry and commercial paper market were propped up; bank depositors were favored with a big extension of deposit insurance. On Dec. 19, as a final act, the Bush administration directed $17.4 billion in TARP funds to keep General Motors and Chrysler afloat so the Obama administration wouldn’t be confronted with their liquidation on its first day in office. There were numerous discrete acts that constituted the bailout. All were undertaken by the Bush administration. There was one heroic, pell-mell effort at bipartisan legislative coalition-building of the sort that never took place during eight years of the Obama administration. That was TARP. Mr. Obama wasn’t even a character in the HBO movie about all this, “Too Big to Fail.” As all now agree, it was Lehman, not the washing through of modest subprime losses, that turned a regional U.S. housing downturn into a global financial panic. In his memoirs, Fed chief Ben Bernanke protests that the Fed knew exactly what a catastrophe Lehman’s unmanaged collapse would be, but its hands were legally tied at the time. Actually, what seemed obvious at the time was that the Fed and Treasury were reacting to the populist revulsion against bailouts. They feared getting on the wrong side of public opinion and the politicians.”, “Obama Did Not Save the Economy”, The Wall Street Journal, January 21, 2017

“I think TARP was a lot more important than Mr. Jenkins notes, as it recapitalized all the Too Big to Fail Banks and other banks, whose capital had been depleted by mark to market losses of securities and reserves for future loan losses.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

Obama Did Not Save the Economy

It’s not his fault he arrived too late to play a role. But getting the credit wrong also gets the blame wrong.

By Holman W. Jenkins, Jr.

As he goes out the door, President Obama is praised lavishly for saving the financial system and warding off a second Great Depression—which indeed would have been an amazing accomplishment for a backbench U.S. senator.

To cite an example almost at random, Harvard economist Kenneth Rogoff claimed on NPR this week that Mr. Obama “pulled us out of a very deep abyss,” though Mr. Rogoff also allowed that President Bush deserves “a little credit here.”

Put aside the desire to be nice to the outgoing president. Such spin is unpromising simply in the face of the calendar.

The Troubled Asset Relief Program may have been the least of the rescue measures, but it was the highest risk, because the people’s bipartisan representatives were required to put their imprimatur on unpopular bailouts. Nonetheless, TARP was enacted Oct. 3, 2008, almost four months before President Obama took office.

On March 16, 2008, the Federal Reserve arranged a fire sale of Bear Stearns. Between Sept. 19 and Oct. 26, numerous other institutions were bailed out; the money-fund industry and commercial paper market were propped up; bank depositors were favored with a big extension of deposit insurance.

On Dec. 19, as a final act, the Bush administration directed $17.4 billion in TARP funds to keep General Motors and Chrysler afloat so the Obama administration wouldn’t be confronted with their liquidation on its first day in office.

There were numerous discrete acts that constituted the bailout. All were undertaken by the Bush administration. There was one heroic, pell-mell effort at bipartisan legislative coalition-building of the sort that never took place during eight years of the Obama administration. That was TARP.

Mr. Obama wasn’t even a character in the HBO movie about all this, “Too Big to Fail.”

When he finally arrived, his contribution consisted of fudgy bank “stress tests,” less to establish confidence in the banks than to establish confidence in the new administration, under lefty pressure at the time to reinflame the crisis by nationalizing the industry.

He gave us a $787 billion pork-barrel “stimulus,” an exercise in hand-waving which ever since has figured prominently in the efforts of Obama publicists to create confusion about what ended the crisis.

His own Council of Economic Advisers, in a yeoman effort, argues essentially that since a second Great Depression didn’t happen, whatever Mr. Obama did gets the credit. Never mind that recoveries normally follow recessions.

Many convince themselves that Mr. Obama surmounted overwhelming political opposition to prop up GM and Chrysler, when the clear lesson of the Bush action is that no president would have been prepared to pay the political price of letting them fail.

We are perfectly serious when we say that Mr. Obama will carry a burden of cognitive dissonance on this point in the decades ahead. It isn’t his fault that he arrived too late to play an important role in the rescue. But in getting the credit wrong, we also get the blame wrong.

As all now agree, it was Lehman, not the washing through of modest subprime losses, that turned a regional U.S. housing downturn into a global financial panic. In his memoirs, Fed chief Ben Bernanke protests that the Fed knew exactly what a catastrophe Lehman’s unmanaged collapse would be, but its hands were legally tied at the time.

Actually, what seemed obvious at the time was that the Fed and Treasury were reacting to the populist revulsion against bailouts. They feared getting on the wrong side of public opinion and the politicians.

New evidence on this agitated question comes from University of Pennsylvania legal scholar Peter Conti-Brown, in his history of the Fed, “The Power and Independence of the Federal Reserve.” He finds Mr. Bernanke’s legal arguments wanting and concludes that political imperatives were indeed paramount.

He also argues that the Fed’s decision, though terrible for the economy, worked out just fine for the Fed. The post-Lehman meltdown justified the central bank’s subsequent bailout efforts and positioned the Fed to survive Dodd-Frank with its powers intact.

OK, presidents get credit they don’t deserve. They also sometimes escape blame. Let it be said that, in the kind of omission that damns a presidency in the eyes of the cognoscenti, it was President Bush who should have and could have stepped up and provided his appointees political cover to spare the world the Lehman meltdown.

 

“U.S. consumers and businesses have enjoyed ultralow borrowing costs since the financial crisis because the Federal Reserve pinned interest rates near zero. At the same time, regulators and lenders intent on fortifying the financial system have clamped down on risk-taking, making it harder for many borrowers to get loans…

…The result is that lending for housing, a pillar of the U.S. economy, has bifurcated. Well-off households and home builders have their choice of loans, while many others without solid credit or stable incomes are locked out. That dynamic is one reason the U.S. has seen such anemic economic growth despite aggressive efforts to encourage investment. Money has been cheaper and more abundant than ever, but—for some—much harder to get. Policy makers have focused on “lowering the cost of capital instead of increasing the availability of credit,” says Mr. Dobson, chief executive of Amherst Holdings, an investment firm in Austin, Texas.”…. Lenders have been reluctant to extend credit to the limits of what government programs allow because of concerns over lawsuits if loans ultimately default, and because the costs of managing delinquent mortgages have soared….“If we had our druthers, we would never service a defaulted mortgage again,” said J.P. Morgan Chase & Co. Chief Executive James Dimon in a shareholder letter earlier this year. “We do not want be in the business of foreclosure because it is exceedingly painful for our customers…and our reputation.” J.P. Morgan cut its mortgage offerings to 15, from 37, and said it had “dramatically reduced” its participation in low-down-payment lending through the FHA. “It is simply too costly and too risky to originate these kinds of mortgages,” said Mr. Dimon.”, “Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’”, The Wall Street Journal, December 5, 2016

Economy

Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’

After prices and rates dropped, regulators and lenders made it harder for borrowers to get loans

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Charles Schetter, CEO of Atlanta’s Smith Douglas Homes, says banks would rather extend credit to large firms than to mom-and-pop builders. PHOTO: KEVIN D. LILES FOR THE WALL STREET JOURNAL

By Nick Timiraos

Sean Dobson wanted to start a mortgage bank four years ago to serve borrowers with middling credit or irregular income. He eventually decided that growing regulatory hurdles and other costs would erase his returns.

Instead, he purchased thousands of homes in states from Texas to Indiana and now rents them to people who might have been his borrowers.

U.S. consumers and businesses have enjoyed ultralow borrowing costs since the financial crisis because the Federal Reserve pinned interest rates near zero. At the same time, regulators and lenders intent on fortifying the financial system have clamped down on risk-taking, making it harder for many borrowers to get loans.

The result is that lending for housing, a pillar of the U.S. economy, has bifurcated. Well-off households and home builders have their choice of loans, while many others without solid credit or stable incomes are locked out.

That dynamic is one reason the U.S. has seen such anemic economic growth despite aggressive efforts to encourage investment. Money has been cheaper and more abundant than ever, but—for some—much harder to get.

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Policy makers have focused on “lowering the cost of capital instead of increasing the availability of credit,” says Mr. Dobson, chief executive of Amherst Holdings, an investment firm in Austin, Texas.

Private investment across the economy is now about 6% above its prerecession level on a per-capita basis, but that obscures large differences. Spending on consumer durables, which include cars, appliances and smartphones, is 21% above prerecession levels. Residential real-estate investment, however, is 22% below its prerecession level, according to the Federal Reserve of St. Louis.

Home prices and sales have risen since 2011, with prices nationally surpassing their 2006 highs, before adjusting for inflation. But new construction collapsed so drastically during the bust that even today it has returned only to levels normally seen in recessions. Sales of new homes are running about 30% below the average between 1983 and 2007 and are lower than every one of those years except for the recession of 1990-91.

“We are at a point when housing should be going gangbusters. It’s not going anywhere,” says Lewis Ranieri, a financier who pioneered the market for mortgage-backed securities in the 1980s. “The people with access to credit have become rich, and the people without access don’t even have a chance to climb up the ladder.”

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Homes are generally the biggest purchase Americans make, and housing dollars ripple through the economy by triggering spending on appliances, furniture and landscaping.

Single-family home construction accounted for 2% of gross domestic product, on average, during the 1990s. It hasaveraged just 1% of GDP since the recession ended in 2009.

Lending for home purchases hit its highest level since 2007 during the April-to-June quarter, but almost all the growth has come from borrowers with credit scores of at least 700. Credit scores run between 300 and 850, with scores below 620 considered subprime. Borrowers with scores below 700 accounted for just 15% of originations, the lowest share of such lending since at least 2000, according to data provider Black Knight Financial Services.

Regulators have defended the spate of rules implemented after the crisis while acknowledging the strain. “No economic sector that precipitates a global financial meltdown could possibly expect to escape far-reaching reforms,” said Richard Cordray, director of the Consumer Financial Protection Bureau, in a speech to mortgage bankers in October. Nevertheless, he added, “the market is not yet supporting access to credit for the full spectrum of creditworthy borrowers.”

Analysts at Pacific Investment Management Co. estimate between one million and 1.4 million Americans who would have been eligible for a mortgage in 2002, before the loosening of lending standards that caused the subprime crisis, couldn’t get a mortgage today.

The bifurcation has made the banking system and the economy less susceptible to the kind of losses that triggered the 2008 financial crisis, but also shows how policy makers retreated from a bipartisan push of homeownership.

The homeownership rate has fallen on a year-over-year basis in every quarter for the last 10 years, and a surge in renting has dropped the homeownership rate to a 50-year low.

Banks would rather extend more credit to large, established firms than make lots of smaller loans to mom-and-pop builders, many of which lost money during the downturn, says Charles Schetter, chief executive of Smith Douglas Homes Inc., a large, privately held builder in Atlanta.

“For the first time, the burden of regulation is setting up a threshold of scale,” says Mr. Schetter, whose company will sell 700 homes this year. He started out in the industry building homes with his father, “when anyone with a hammer, a pickup truck and access to local tradesmen” could start a company, which he says would be difficult today.

Consolidation in the home building and banking industries predated the financial crisis but accelerated during the downturn. Banks with more than $100 billion in assets held around two-thirds of construction loans in 2016, up from less than half during the housing bubble and less than one-third in 2000, according to the Mortgage Bankers Association.

Suppliers and vendors throughout the housing ecosystem were left reeling from the crash, and builders say their challenges finding plumbers, electricians and house framers has begun to limit their ability to build homes.

Jim Ellenburg started his own flooring supply and installation company in 2009 after he was laid off from a firm that closed when builders couldn’t pay their bills. He couldn’t get a loan to start the company, so he used his credit cards. Now that his company has a solid record—he expects $90 million in sales this year in three states—banks are eager to lend.

“That’s part of the problem: You can’t get credit until you can demonstrate you don’t need it,” says Mr. Ellenburg, owner of Cartersville Flooring Center in Cartersville, Ga.

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After Sean Dobson of Austin, Texas, decided not to start a mortgage bank, he bought thousands of homes from Texas to Indiana and now rents them to people who might have been his borrowers. PHOTO: CATALIN ABAGIU FOR THE WALL STREET JOURNAL

With home prices nationally now above their highs of last decade, investors who took huge risks buying tens of thousands of homes as the market hit bottom are reaping the benefits. Some of their renters are former owners who couldn’t pay their mortgages after the bust and weren’t able to buy again when homes became much cheaper because they couldn’t meet lenders’ tightened requirements.

Mr. Dobson’s rental-home firm, Main Street Renewal, rents 11,000 homes in 18 states, primarily in the South and Midwest. “Unless something changes dramatically in Washington, this is the way a lot of people are going to be in their first home,” says Mr. Dobson, who is still tinkering with ways to start a mortgage bank.

On a recent Saturday afternoon, Margaret Wooten of the Chicago Urban League counseled renters at a homebuying fair on the basics of getting a loan in today’s more stringent environment.

On a packed bus touring foreclosed properties about to hit the market on Chicago’s South Side, Ms. Wooten explained how banks’ insistence on using tax returns to verify incomes—put in place to satisfy the new ability-to-repay regulations—had created bigger hurdles for small-business owners and the self-employed. They sometimes legally write off business expenses to lower their taxable income but then can have trouble proving their higher take-home pay to lenders.

“No, you didn’t have to pay Uncle Sam, but you’re not going to get that home, either,” she told attendees. Ms. Wooten cautioned against going out to buy furniture or a new car after getting approved to buy a home.

“Do not touch anything after you’ve been approved,” she said. “Leave your credit as it is.”

By some measures, mortgage standards aren’t any tighter today than they were in the early 1990s. But demographic changes, including more households delaying marriage and a higher share of younger households with less inherited wealth, suggest that, when combined with more-stringent credit rules, a homeownership rate below the historical level of 64% “is absolutely here to stay,” says Laurie Goodman of the Urban Institute think tank.

“I’ve sat through four years of home-buyer classes where people know they are missing out on the deal of a lifetime and can’t get the credit to compete for it,” says Glenn Kelman, chief executive of Redfin, a real-estate brokerage that operates in 37 states.

Policy makers have struggled for decades to find the right lending balance. Beginning in the 1970s, regulators tried to end a discriminatory practice known as “redlining,” in which banks avoided predominantly African-American neighborhoods.

By the late 1990s, Wall Street rushed into the subprime-mortgage business, long dominated by local niche lenders, transforming pools of those loans into highly rated securities. When the Fed started raising rates in 2004, lenders lowered standards to keep loan volumes from falling.

“No one thought about affordability or sustainability,” says Ms. Wooten, the Chicago housing counselor. “The only thing they thought was, ‘Everybody can be a homeowner.’ That was crazy.”

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New homes under construction earlier this year in Arvada, Colo. PHOTO: RICK WILKING/REUTERS

When property values fell in 2007, the riskiest loans defaulted, credit tightened and the economy ultimately fell into a recession.

Congress responded in 2010 by passing the Dodd-Frank Act, which created the new Consumer Financial Protection Bureau, and asked it and other regulators to flesh out several new sets of rules, including requiring lenders to ensure borrowers have the ability to repay loans.

The government took control of mortgage giants Fannie Mae and Freddie Mac, which together with agencies such as the Federal Housing Administration guaranteed most new mortgages. Fannie and Freddie increased fees for riskier borrowers, widening the gap between mortgage rates available to borrowers with good and weak credit.

By late 2011, the Obama administration had grown worried about the cumulative effect of the new rules and ultimately prevailed on regulators to back off some of the most stringent proposals.

“There was a lot of concern that steps intended to protect the market would end up locking people out,” says James Parrott, a former White House official involved in those efforts who is now a mortgage-industry consultant.

Lenders have been reluctant to extend credit to the limits of what government programs allow because of concerns over lawsuits if loans ultimately default, and because the costs of managing delinquent mortgages have soared.

“If we had our druthers, we would never service a defaulted mortgage again,” said J.P. Morgan Chase & Co. Chief Executive James Dimon in a shareholder letter earlier this year. “We do not want be in the business of foreclosure because it is exceedingly painful for our customers…and our reputation.”

J.P. Morgan cut its mortgage offerings to 15, from 37, and said it had “dramatically reduced” its participation in low-down-payment lending through the FHA. “It is simply too costly and too risky to originate these kinds of mortgages,” said Mr. Dimon.

 

“The Justice Department last year sued the Detroit-based mortgage lender on charges that it knowingly approved loans that violated Federal Housing Administration rules for government mortgage insurance. The charges didn’t make Quicken Loans unique, as the Obama Administration has spent years wringing settlements out of lenders without having to prove its charges in court…

…In the larger campaign to blame the 2008 financial crisis entirely on private business—rather than federal housing and monetary policy—the government has raided banks for more than $100 billion…..Mr. Gilbert says his company offered to “step in to FHA’s shoes and take over providing insurance on our FHA loans; meaning we would collect the premiums on the loans and pay out any claims. Not surprisingly, they weren’t interested.”…. But not holding a trial at all would be the wisest course, not least because Justice is likely to lose in court. By dropping the case, Mr. Sessions can show that the Justice Department is done extorting business for political show. All Trump cabinet officers should send similar tidings to ring in a new era of growth.”, The Wall Street Journal Editorial Board, December 20, 2016

Opinion

The Quicken Loans Signal

Jeff Sessions can review and drop a bad anti-business prosecution.

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Donald Trump’s choice for Attorney General, Sen. Jeff Sessions, in Washington on Nov. 29. PHOTO: ASSOCIATED PRESS

Faster than a Rocket Mortgage, Attorney General nominee Sen. Jeff Sessions can send a message that the Obama era of arbitrary, political prosecutions of business is over. Soon after confirmation, he and his new team should review and then kill the government’s dubious civil case against Quicken Loans.

The Justice Department last year sued the Detroit-based mortgage lender on charges that it knowingly approved loans that violated Federal Housing Administration rules for government mortgage insurance. The charges didn’t make Quicken Loans unique, as the Obama Administration has spent years wringing settlements out of lenders without having to prove its charges in court.

Last week Justice issued a press release celebrating that since January 2009 it has extracted more than $7 billion using a single legal technique—False Claims Act cases related to federally insured mortgages. In the larger campaign to blame the 2008 financial crisis entirely on private business—rather than federal housing and monetary policy—the government has raided banks for more than $100 billion.

So it was no surprise that Justice wanted a bite of Quicken’s earnings. What may have surprised the feds, given the normal corporate desire to write a check and make Washington go away, is that Quicken founder Dan Gilbert had no desire to settle.

Mr. Gilbert tells us that “it would lack integrity and ring hollow to our 17,000 employees to pay some large, unwarranted settlement and admit things we did not do just because a young lawyer walks in with a business card that says ‘DOJ’ on it.” Mr. Gilbert, who owns the National Basketball Association’s Cleveland Cavaliers, seems ready to compete in the courtroom, too.

The government’s case is built on a handful of internal Quicken emails with disparaging comments about particular loans. But if some great offense has been committed, it’s hard to find it in the records kept by the alleged victim.

A critical metric the FHA uses to judge lenders is known as the “compare ratio.” Specifically, it compares the rate of early defaults and claims generated by one lender with the rate generated by other lenders who cover the same area. A lender that never originates a bad loan would have a ratio of 0% and a lender with an average rate of defaults would be marked at 100%. According to the government’s own data, Quicken’s compare ratio is 35%—not merely better than average but the best score among all large national lenders.

Mr. Gilbert says his company offered to “step in to FHA’s shoes and take over providing insurance on our FHA loans; meaning we would collect the premiums on the loans and pay out any claims. Not surprisingly, they weren’t interested.”

Federal Judge Reggie Walton recently rejected the government’s attempt to hold a trial in Washington instead of Quicken’s home state of Michigan. But not holding a trial at all would be the wisest course, not least because Justice is likely to lose in court. By dropping the case, Mr. Sessions can show that the Justice Department is done extorting business for political show. All Trump cabinet officers should send similar tidings to ring in a new era of growth.