As the housing and financial markets heal from the 2008 crisis, the structure of the mortgage market is evolving to meet the needs of today’s consumers. This is not without precedent. Over the last several decades the market share of mortgage lending and servicing activity by charter or business model has shifted with changes in the broader financial markets.
The diversity of business models and charters in our mortgage market is one of its strengths. Big banks, small banks, non-depositories, credit unions, REITs, the list goes on. When market factors impact the ability of one sector to meet consumer needs, lenders with different business models are able to fill the gap.
In the wake of the financial crisis, nonbank lenders and servicers have witnessed a significant emergence in the mortgage business. In fact, independent mortgage banks (IMBs) are heavily dominating the single-family market. The IMB share of overall mortgage originations has increased from 25% in 2008 to 40% in 2013, according to MBA’s own research.
However, IMBs’ current success is less of an “emergence,” and more of a “reemergence.” In reality, nonbank lenders have always been a part of the real estate finance industry and over the years, their participation has ebbed and flowed. In fact, many businesses have survived and thrived for decades, and the management in these companies has been proven highly competent over the long haul.
Yet misperceptions persist about the capacity of these IMBs and other nonbanks.
Many pundits as of late have expressed concern that the housing market is in danger because nonbanks are thinly capitalized, compared to larger lending institutions, and that their current expansion could trigger another mortgage collapse.
For a second, let’s set aside the significant regulatory constraint these nonbanks are currently experiencing and address their capital requirements.
IMBs fund mortgage loans through a combination of the owners’ personal capital and by utilizing warehouse lines of credit. Mortgages are the only business they do, and all their capital is dedicated to their mortgage business. By comparison, depository lending institutions have a variety of different business lines that put demands on their capital. They hold some assets on balance sheet and sell others. Assets range from consumer credit, residential and commercial real estate leasing, to corporate credit facilities and agricultural lending. Thus, you can’t just look at two institutions’ balance sheets and make an easy comparison as to which type of institution is “better” capitalized.
Beyond the apples-to-oranges comparisons of capitalization levels, critics also fail to grasp the level to which nonbanks are regulated as licensed entities, and subjected to market discipline by counterparties with whom they do business. First, IMBs and other nonbank lenders are regulated, examined and supervised by the Consumer Financial Protection Bureau, which looks not only at whether mortgage lending rules are being followed, but whether the IMBs have robust governance, reporting and compliance management systems in place. As a result, the mortgage market is producing some of the highest quality loans ever made, consumers are safer, and non bank lenders face more robust oversight than ever before.
Moreover, unlike national depository lending institutions, nonbanks are subject to company licensing and regulation in every state in which they operate. State regulators collect and review quarterly financial statements including balance sheet and income data, as well as quarterly data on IMB’s origination and servicing activities. IMBs and other nonbank lenders are also subjected to market discipline via the counterparty oversight activities of their warehouse banks, Fannie Mae, Freddie Mac, Ginnie Mae and FHA, all of whom review and analyze the financial and operational performance of their IMB customers.
Also, just because regulators are involved, doesn’t mean their actions are always beneficial. Take for instance the liquidity requirements of banks versus nonbanks. Banks typically have greater access to liquidity than non banks, as banks can offer federally insured deposits and have access to Federal Home Loan Bank (FHLB) advances and the Fed's discount window.
Non banks access liquidity through warehouse lenders, repo financing, and for some through FHLB advances if they have an affiliated insurance company. Recent moves by regulators to crimp the availability of repo financing, and the FHFA's proposal to limit FHLB membership, would make non bank lenders’ liquidity challenges worse. So reevaluating recent moves such as this would not only benefit the marketplace but answer some critics’ concerns about liquidity standards.
Nobody can predict the future of the mortgage or any other financial market. However we can take solace in the fact that the business models of nonbanks, coupled with significant government oversight, are operating in an environment that protects all parties involved.