Staff members of the Board of Governors of the Federal Reserve System (“FRB”) issued a report warning that nonbank mortgage lending has increased within the mortgage market to historically high levels, a potentially dangerous development given the short-term lending that nonbank mortgage lenders rely on and the liquidity pressures that could emerge as a result. According to the report, as of 2016, almost half of all mortgages in the U.S. originated with nonbanks (up from around 20% in 2007). These loans represent 75% of the loan originations sold to Ginnie Mae in 2016, indicating that weaknesses in the sector could lead to taxpayer losses. The authors argued that liquidity issues in the nonbank mortgage sector played a significant role in the financial crisis, and questioned the viability of concentrating so much risk in such a vulnerable sector.
The report further describes:
- why the funding and operational structure of the nonbank mortgage sector remains a significant channel for systemic liquidity risk in U.S. capital markets;
- why these risks could lead to dislocations in mortgage markets, especially for minority and low-income borrowers;
- how liquidity pressures played out during and after the 2007-2008 financial crisis;
- the appeals that nonbank mortgage industry made to U.S. government for assistance; and
- the ways nonbanks are still exposed to significant liquidity risks in their funding or mortgage originations and in their servicing portfolios.
As noted, the analysis and conclusions set forth in staff working papers “do not indicate concurrence” by the Board of Governors. The report was authored by You Suk Kim, Steven M. Laufer, Karen Pence, Richard Stanton and Nancy Wallace.
Lofchie Comment: Is this an example of a situation where over-regulation of small banks ended up chasing business away from the regulated sector? Or was the move from regulated bank lenders to non-regulated lenders inevitable given the costs of regulation at any level?