Nonbank Mortgage Lenders

Should we be concerned?

If you think that residential home mortgage lending today is done primarily by banks, you have another think coming. (Yes, the expression is “another think”, not “another thing” as many people seem to believe.) Nonbank mortgage lenders now originate more than two-thirds of all US residential mortgage loans (for new home purchases and refinancings), and the nonbanks’ share is even larger for smaller loans to lower credit borrowers, including those who borrow through government guaranteed loan programs. This is a big change from ten years ago after nonbank lenders got crushed by the financial crisis, leaving the mortgage market largely to the big depository banks who concentrated their mortgage lending on “jumbo” loans to their best and most creditworthy customers.

You will recall that much of the most aggressive (abusive?) mortgage lending and subprime securitization done in the lead up to the financial crisis was originated by nonbank lenders, including entities owned by some of the large Wall Street investment banks. The mortgage lending excesses that triggered the 2008 financial crisis were not for the most part attributable to the activities of the big depository lenders (like Wells Fargo), although some of them were certainly complicit (like Citi). And all of them got caught up in the financial carnage, banks and nonbanks alike, complicit or not.

On this point, you may recall the scene from the film “Too Big to Fail” in which Wells Fargo’s chairman Dick Kovacevich angrily questions why Wells Fargo needs to participate in the Treasury’s mandatory capital increase, along with “you New York banks with your fancy products”. Under the circumstances, I think we can all understand his frustration. You can watch the scene here:

It is now over a decade since the financial crisis was resolved (in the US at least) and the nonbank lenders are back in business, big time. In the mortgage market, nonbank lenders are again taking share from the more tightly regulated depository lending banks. But the character of the nonbank mortgage lenders has changed significantly since the early 2000’s. The nation’s largest mortgage lender prior to the financial crisis was the scandal prone Countrywide Financial (acquired by Bank of America, much to its chagrin). It is is now Quicken Loans (Rocket Mortgage), whose share of new mortgage originations doubled during 2020, compared to a 10% increase at the #2 originator Wells Fargo. (Having recently refinanced my personal mortgage loan with Wells Fargo, I am not surprised at the success of Rocket Mortgage.)

But from a public policy perspective, should we care about who originates and services mortgage loans or how these firms are regulated? Yes we should. Housing is a large and critical component of the US economy and when the housing market contracts so does the economy (and vice versa). A strong and stable housing finance (mortgage) market is vital to the overall stability of our financial and economic system and also to the well being of our citizens. And this in turn requires that all mortgage lenders be governed and regulated sensibly. Government regulation is necessary because unfortunately we cannot simply rely on the management and boards of lending institutions always to operate in ways that are financially sound, sustainable and protective of their customers’ interests. We learned this lesson in in 2008, at least I hope we did.

The large US depository lending banks are now highly capitalized, very liquid and highly regulated (perhaps over-regulated). They are once again boring, from a financial perspective. But from a public policy perspective, boring is good. This is not true of the nonbank lenders, which perhaps operate more dynamic businesses but which are also more lightly regulated and financially unstable than the banks. As a mortgage customer you may or may not care about who lends you money (assuming you get your loan and it continues to be serviced without interruption), but from a social and public policy perspective you probably should.

Much of the financial regulation imposed following the 2008 financial crisis was understandably directed at the big banks (depository and non-depository), resulting in a movement of systemic risk out of the highly regulated banking system and into the less regulated nonbank sector. As we have learned in class, and experienced repeatedly in the real world, regulation does not generally “remove” risk, it just “moves” risk, in this case from the banks to the nonbanks. (If you remember nothing else from this post, remember this please.)

I have posted before on the nonbank sector of the financial services industry, and will no doubt do so again. But in the meantime, you may be interested to read some of the articles below, which are specifically about nonbank mortgage lending.

Links:

Nonbank Lenders are Dominating the Mortgage Market, WSJ 6.22.2021: https://www.wsj.com/articles/nonbank-lenders-are-dominating-the-mortgage-market-11624367460?mod=hp_lista_pos1

Regulators See Nonbank Mortgage Firms as Potential Risk to US Financial System, WSJ, December 4, 2019: https://www.wsj.com/articles/regulators-see-nonbank-mortgage-firms-as-potential-risk-to-u-s-financial-system-11575498244

Mapping the Boom in Nonbank Mortgage Lending—and Understanding the Risks, Brookings, September 10, 2018: https://www.brookings.edu/blog/up-front/2018/09/10/mapping-the-boom-in-nonbank-mortgage-lending-and-understanding-the-risks/

Who Regulates Mortgage Lenders? Investopedia: https://www.investopedia.com/ask/answers/081716/who-regulates-mortgage-lenders.asp

Revisiting Regulations for Nonbank Mortgage Lenders, DS News, November 23, 2020: https://dsnews.com/daily-dose/11-23-2020/revisiting-the-regulatory-framework-for-nonbank-mortgage-lenders