Where is the US economy going? Who will win March Madness? Will it rain next week? There are hardly any topics on which we all collectively agree—which makes it exciting to report that we all seem to agree that non-bank lenders are the future of mortgages.
In 2013, Bloomberg Business reported that record mortgage profits at major banks such as Wells Fargo and JPMorgan Chase were fading fast. Today, only six of the top twenty mortgage originators from 2006 are still servicing residential mortgages, according to Fannie Mae. Kroll Bond Rating Agency predicts that over the next few years, the top four commercial banks will downsize or exit entirely from the business of originating and servicing residential mortgages.
Why are the banks casually exiting this market? It’s simple; bank’s profits from mortgage originations fell by forty percent in 2013, persuading many banks to focus on commercial lending.
Then there is the other MAJOR reason.
Over the past few years we’ve been spoiled by historically low mortgage rates (rates averaged over six percent from 2000 to 2006, and they averaged nearly ten percent from 1975 to 2000!), and typically mortgage rates drop due to a struggling economy. With this said, some streams of logic could reason that historically low interest rates equate to a historically bad economy, but the economy of recent times has been far from historically bad. What is allowing miniscule rates to persist even in an economy with a 5.5 percent unemployment rate is the Fed dropping rates to nearly zero, combined with an influx of competition from the same private lenders who are driving banks out of mortgage originations.
So what does this mean for the industry? The sentiment is overwhelmingly positive. Though banks will hardly consider anyone without a pristine credit score, private lenders are preventing homeownership from becoming the exclusive province of the super-wealthy. “Non-bank lenders have led the way in recent years in providing access to credit for qualified low- and moderate-income, minority, and underserved homebuyers,” says the Community Home Lenders Association.
“I am really happy about the non-depositories coming into the program,” says Ginnie Mae President Ted Tozer. “We really are very supportive of them being in the program. The housing market would be a lot worse off without them.”
Of course, there are naysayers. The biggest worry is that non-banks are not backed by the FDIC, and they did not receive bailout money in 2008. With these private non-banks now taking on the bulk of risk, another major collapse could hurt even more than it did ten years ago.
But this is no reason for panic. Private lenders make their money by selling loans in bulk to the government. That means they aren’t making money unless the loans they are taking carry a low enough risk to be approved by groups like Fannie Mae, Freddie Mac, and Ginnie Mae. “Instead of a taxpayer safety net, non-bank lenders are subject to market discipline,” explains Scott Olsen of American Banker.
The agencies working with non-bank lenders have found a happy medium where they have stiffened lending, without overreacting to 2006. Also remember, the FHA’s level of risk has not touched 2006 levels, while it has risen enough since 2010 to allow moderate-income buyers with medium-risk credit scores to enter the market.
In addition, the VA has a common-sense guideline for discretionary income and a foreclosure prevention team which gets regular updates on every single VA loan in the country, alerting homeowners if they are in danger of foreclosure. The VA estimates that this helped avoid 90,000 foreclosures last year.
Finally, non-bank lenders are subject to new regulations that would have prevented the last housing crisis in the first place. They must come under exam and audit supervision by the Consumer Financial Protection Bureau. Non-banks are subject to net worth, liquidity, and financial regulation related to the federally guaranteed loan products they underwrite—including FHA, GNMA, Rural Housing Service, VA, and Fannie Mae and Freddie Mac. Also, as we mentioned weeks ago, non-bank loan originators have a list of trainings and tests—from becoming licensed in every state in which they do business, to demonstrating financial responsibility—that are not required for bank loan originators.
More and more every day, the mortgage industry is in the hands of private non-bank lenders. That means the industry is in good hands.