IMBs and the bridge they create to affordable homeownership

Last week, Senator Elizabeth Warren submitted a letter to the Financial Stability Oversight Council requesting they impart heightened regulations on nonbanks to mitigate their risk to the overall financial ecosystem. Her letter referenced nonbank mortgage lenders, commonly known as independent mortgage banks, as entities that should be subject to more scrutiny.  However, this vastly overstates the risks of IMBs and would put minority and other underserved first-time homebuyers at risk.

In the aftermath of the 2008 crisis, banks began to retreat from originating and servicing mortgage loans, with many just pulling back to either just warehouse lending to IMBs or just buying loans IMBs originate. To fill the void that banks left when they exited from the direct-to-consumer lending market, IMBs stepped in – and now originate some 70% of new mortgage loans. And as the source of credit for some 90% of FHA, VA, and Rural Housing Service (RHS) loans, IMBs play an incredibly critical role in fueling the American dream for low-to-moderate income and minority borrowers.

In a report by the Urban Institute, analysts illuminated that IMBs lend at a significantly higher rate to borrowers of color in comparison to banks – exceeding these large financial institutions in neighborhoods of color by almost 4%.

Unfortunately, policymakers are all too quick to categorize IMBs, especially larger IMBs, as financially risky institutions; making them easy targets for stricter - and unnecessary - federal oversight and regulatory efforts. The reality is that IMBs already experience robust state and federal regulation, with the typical IMB undergoing numerous state exams and routine performance monitoring by FHFA, the GSEs, and Ginnie Mae.

A second reality is that while larger IMBs may originate loans just like banks, they are distinctly different in that they are not risk-taking entities. Rather than buying and holding assets like banks do, nonbanks pass through their credit risk to government-backed lending institutions such as FHA, Fannie Mae, and Freddie Mac, and in return, get paid a fee to service these loans for the government-sponsored entities.

Despite these hard defined truths, policymakers continue to extrapolate from events like the Silicon Valley Bank failure to conclude, without evidence, that there must be some reason to be concerned about IMBs, some reason to expand regulation of IMBs.  But this ignores the reality about how IMBs do business, and the exceeding low taxpayer and systemic risk of these entities.

A misguided overreaction and overregulation of IMBs will not just hurt these entities – it will hurt the millions of minorities and underserved families that hope to one day own a home and increase their generational wealth.  They rely on the fact that IMBs lead the market in access to mortgage credit and creating more affordable mortgage loans for these families.

A good example is FHA loans – which dominate first-time home purchase loans, by serving qualified borrowers with low down payment capabilities and minor credit blemishes.  FHA relies on Ginnie Mae to securitize their loans, and IMBs now issue 90% of Ginnie Mae securities.

IMB issuers are not looking for a bailout.  However, the Ginnie Mae program requires them to act as a banker to defaulted borrowers by making advances, which can create liquidity strains in stressed economic environments.  Banks that service mortgage loans have a plethora of liquidity sources – like FDIC insurance, FHLB advances, and cheap Fed funds.  But IMBs have no liquidity facility to help them meet rising servicing advance demands.

Ted Tozer, former Ginnie Mae President and current Urban Institute fellow, has a proposal that would create a financing mechanism for these advances. However, since that could take some time to put together, in the short run, the easiest thing would be to expand the Pass-Through Assistance Program (PTAP) program.

Ginnie Mae established the PTAP program in the spring of 2020 as a response to concerns about the impact of COVID on a borrower's ability to pay their mortgage payments as well as the Congressionally mandated right to forbearance on loans issued by federal agencies. Given that 90% of Ginnie Mae securities are serviced by IMBs, the expansion of such a program would promote sustainability within the lending ecosystem by bolstering access to mortgage credit and increasing warehouse lender confidence in issuers. PTAP would continue the flexibility IMBs have to service underserved and first-time borrowers while also providing better financial security.

Homeownership is a privilege that every American should have access to equally. Increased regulation always sounds good on paper, who can oppose that?  But the reality is that overregulation of IMBs would have real world consequences. And the continued unjustified focus on non-banks may prove to only harm communities of color and first-time homebuyers who are far better served by IMBs than any other market segment. Focusing on solutions for longer term security is where policy makers should spend their time.