Since the crisis, banks have increasingly stepped away from mortgage lending. They are still paying up for bubble-era offenses and feel newly-imposed regulations are so strict as to be punitive. Banks made about 52% of all home loans in 2014, down from 74% in 2007, and many analysts think that share is going to go much lower.
Also read: Big banks are fleeing the mortgage market
Companies often called “nonbanks,” or “mortgage bankers,” like Quicken and Nationstar NSM, +1.63% , are stepping into that void. Nonbanks are held to the same standards as banks for lending and servicing mortgages, but don’t have many of the same resources banks do.
If an economic downturn caused a rash of borrowers to be unable to make payments, banks low on cash could tap emergency funds through the Federal Reserve. And their deposits are protected by the Federal Deposit Insurance Corp.
But more to the point, if nonbanks come up short on liquidity, they must turn to banks for short-term financing – and it’s not clear whether such requests would be honored.
“Non-banks are at a structural disadvantage to banks,” said Chris Whalen, head of research at Kroll Bond Rating Agency and a long-time bank analyst. “The people running these businesses know what they’re doing. But no matter what they’re doing, there’s someone sitting at Wells or Citi who can pull the plug.”
Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch, “I think it’s a very serious concern, not an issue for tomorrow or next year, but this should be addressed and resolved to everyone’s satisfaction because in the next crisis it will be key. In a crisis, when investors are panicked, there are going to be very reluctant to extend credit to smaller, less-established institutions, including many of the non-banks.”
Big shifts in lending since the last crisis are driving that concern. A much larger share of mortgages are now backed by the Federal Housing Agency, rather than Fannie Mae and Freddie Mac. And nonbanks make up two-thirds of FHA lending.
|2006||Countrywide Home Loans is #1 mortgage originator, with $175.3 billion and nearly 7% market share. Top originators also included American Home Mortgage, Inc., New Century Mortgage Corp, Fremont Investment and Loan. Nonbanks account for 36% of originations.|
|2007||American Home Mortgage and New Century file for bankruptcy|
|2008||Countrywide is sold to Bank of America, Fremont is sold to CapitalSource Inc.|
|2008||Nonbanks originations hit low of 23%|
|2010||Dodd-Frank Wall Street Reform and Consumer Protection Act is signed into law|
|2013-2014||Over a nine-month period, big banks including J.P. Morgan Chase, Bank of America, and Citigroup strike deals with the government over bubble-era misdeeds, totaling over $16 billion. Such settlements have continued, and the government has also started to pursue lenders for post-crisis wrongdoing.|
|2014||Nonbank originations make up 43% of the market|