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Smaller IMBs are better placed to weather challenges than larger ones, CHLA claims

CHLA urges policy makers to reject calls to contract credit at a time of homeownership affordability challenges

A doubling of 30-year fixed rate mortgage rates, shrinking profit margins and a risk of recession presents a challenging environment for independent mortgage banks (IMBs), but smaller IMBs are better positioned to weather challenges, claimed the Community Home Lenders of America (CHLA), a lobby group that represents smaller mortgage lenders.

Large IMBs with portfolio holdings or a non-qualified mortgage (non-QM) loan focus have more risk than smaller IMBs, concluded the CHLA’s latest report, which was issued Wednesday. Adding to the risk is shareholder pressure for larger IMBs that went public, making downsizing harder, the trade group said. 

IMBs’ highest priority is to reduce and align expenses with shrinking loan volume and reduced profit margins. IMBs are already cutting expenses – through layoffs and through reduced loan originator costs, the report added.

With the mortgage origination market forecast to downsize by 40% this year from 2021 and mortgage rates topping 7% in October, lenders big and small have laid off its employees across multiple rounds of layoffs.  

The Mortgage Bankers Association (MBA) forecasts that if the mortgage industry experiences a 65% drop in origination volume between the fourth quarter of 2020 and the first quarter of 2023, production employment will likely need to be scaled back by 24 to 31%. As of second quarter 2022, the MBA expects the employment cut to be only between 2 and 10%.

The basic IMB business model is to originate federally backed mortgages including FHA, VA, government-sponsored enterprise (GSE). This largely insulates IMBs from any impact of higher mortgage loan defaults or foreclosures – unlike bank portfolio lenders or private label securities participants, according to the CHLA.

The structure of the CHLA changed in August after the Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA), two Washington, D.C. lobby groups joined forces to compete with the voices of larger mortgage banks and depositories. 

The group’s latest report calls on federal policies to prioritize access to mortgage credit. With homeownership affordability under pressure and mortgage rates and home prices rising, the report urged federal policy makers to refrain from taking actions that contract mortgage credit in this environment. 

The IMBs originated 90% of FHA and VA loans and issued 90% of Ginnie Mae mortgage-backed security, the report said. In 2021, non-depository institutions accounted for 64% of first-lien, owner-occupied, site-built home-purchase loans. 

In 2021, the IMB share of FHA loans grew to 90% from 57% in 2010, a consequence of the banks leaving the space in droves since the housing crisis more than a decade ago.

“FHA is designed to encourage lenders to make credit available to borrowers whom the conventional market does not adequately serve, including first-time homebuyers, minorities and lower-income families,” the report said citing the U.S. Department of Housing and Urban Development (HUD). The IMB share of Ginnie Mae issuance increased to 90% from 12% during the same period. 

“Maintaining a broad base of Ginnie Mae issuers and GSE seller and servicers is critical to competitive execution of loans for consumers, particularly for minorities and other underserved borrowers,” the report noted.

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