Although the big banks such as Bank of America (BAC - Get Report) , JPMorgan Chase (JPM - Get Report) and Wells Fargo (WFC - Get Report) are still happy to provide mortgages to wealthy borrowers with strong credit records, they are much more cautious about higher-risk loans, even ones that meet underwriting requirements of government agencies such as the Federal Housing Administration, Fannie Mae (FNMA) , Freddie Mac (FMCC) or Ginnie Mae.
That has created an opportunity for nonbank lenders such as Freedom Mortgage, a privately held lender based in Mount Laurel, N.J.
Although fewer mortgages were originated last year than in 2013, Freedom Mortgage actually increased its business, selling $22 billion worth of mortgages, according to Chief Executive Stanley C. Middleman.
He expects to originate more than $30 billion this year.
Freedom Mortgage was the 10th-most-active mortgage lender in the United States during the first quarter last year, according to Inside Mortgage Finance, a trade publication.
"If you don't have a lot of legacy issues to drag around with you it's a lot easier to be nimble, and I think that's been a big part of our advantage," Middleman said.l
Many of the loans that Freedom Mortgage sells are insured by the FHA.
Indeed, when the government mortgage insurer this month reduced the annual premium that it charges by 0.5 percentage points, Freedom Mortgage said that it would hire up to an additional 500 employees to meet the expected rise in demand.
By contrast, during a Jan. 14 earnings call, JPMorgan Chase Chief Executive Jamie Dimon cited two reasons that the bank continues to avoid making FHA loans.
"One is the ongoing liability on the production side where the insurance was worthless over time, and the second is just the cost of servicing FHA loans when they go in default, and they have a much higher chance of going into default than not," he said.
Dimon is concerned that making government-backed mortgages to borrowers with a relatively high likelihood of default is more trouble than it is worth, according to FBR Capital Markets analyst Paul Miller.
"When you do something wrong, the FHA doesn't come after you. The Department of Justice sues you for triple damages," Miller said.
"What the government has done is criminalize the foreclosure," he said.
JPMorgan Chase paid $13 billion to the Justice Department in November 2013, the largest of several fines that it has paid since the financial crisis over mortgage-related misconduct. BofA has paid even more, while Wells Fargo, despite facing less liability than those banks, has still shelled out billions in government fines.
Although banks have faced the greatest liability over mortgages, that doesn't mean that nonbanks are immune to regulatory pressure.
Just ask Bill Erbey, former chairman of Ocwen Financial (OCN - Get Report) . He relinquished the company's banking license in 2004 in the hopes of being less tightly regulated, but a crackdown by New York financial services superintendent Ben Lawsky cost Erbey his job and much of his net worth as Ocwen shares have declined some 85% over the past year.
Quicken Loans maintains that it is very conscious of the risks that it faces even as it picks up market share. Quicken Loans was the No. 3 mortgage lender in the United States through the first three quarters last year.
The threat of government penalties is "an absolute concern of all of ours, but we've maintained that staying in the hunt and serving our clients is what we're doing right now," said Quicken Loans Chief Economist Bob Walters. "We're pretty committed at this point to doing it for all different types of borrowers and all different investors, and that includes FHA."