Recent reports of nonbank mortgage lenders' growing market share of government-backed loans have raised concerns among some policymakers and industry observers. Some critics argue that nonbank lenders are less capitalized than banks and that their loans to riskier borrowers could therefore pose a greater danger to the financial system in the event of a downturn.
But these fears arise from an inaccurate understanding of nonbank mortgage lenders, which have played a key role in expanding Americans' access to homeownership. As the only national association exclusively representing nonbank mortgage lenders, the Community Home Lenders Association is proud to report that nonbank lenders have led the way in recent years in providing access to credit for qualified low- and moderate-income, minority and underserved homebuyers. Without us, there would be more industry concentration, higher consumer costs, and more risk to the financial system.
The role of nonbank mortgage lenders in providing mortgage credit has grown in the years since the financial crisis for a number of reasons. One is that as we came out of the 2008 housing crisis, many banks decided that profit levels on mortgage loans didn't deliver enough returns. Some got out of the business, while others chose to only serve borrowers with the best credit quality.
But there are other reasons for nonbank lenders' growth in market share. After the private-sector mortgage-backed securities market collapsed in 2008, lending gravitated toward government-backed loans.
Nonbank lenders have always played a major role in originating Federal Housing Administration loans. What has changed in the last few years is that banks used to fund a sizable portion of nonbanks' FHA loans. With their withdrawal, nonbank lenders increasingly turned to Ginnie Mae to fund their own loans. As a result, nonbank issuance of Ginnie Mae securities has exploded from around 20% in 2012 to over 50% of the market, according to the organization's data.
All this is a welcome development, according to Ginnie Mae president Ted Tozer. "I am really happy about the non-depositories coming into the program," Tozer said in a recent National Mortgage News article. "We really are very supportive of them being in the program. The housing market would be a lot worse off without them."
Many consumers have also shown a preference for nonbank lenders, which provide personalized mortgage loan origination and servicing to their borrowers. This strikes a significant contrast to the many distressed borrowers that have struggled with impersonal servicing by some of the big banks and mega-servicers.
Against this backdrop, it is important to understand that nonbank mortgage lenders are in fact already very well-regulated. In the wake of the 2008 housing crisis, consumer protections and regulation of nonbank lenders have been significantly strengthened. Like the banks, nonbanks are subject to all the new mortgage consumer protection rules and regulations promulgated under Dodd-Frank.
In addition, the individuals working on consumers' loans at nonbanks are subject to much more stringent qualifications requirements than individuals working at banks.
Under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, nonbank loan originators must be licensed, pass the SAFE Act mortgage competency test, pass an independent background check, and complete eight hours of SAFE Act continuing education courses each year. In contrast, bank mortgage originators are exempt from all of these requirements — an exemption that is virtually unique among mortgage and financial services professionals.
Nonbanks are also regulated by multiple parties. They are supervised by every state in which they do business. In the wake of the housing crisis, nonbank lenders have also come under exam and audit supervision by the Consumer Financial Protection Bureau. And nonbanks are subject to net worth, liquidity and financial regulation related to the federally guaranteed loan products they underwrite — including FHA, GNMA, Rural Housing Service, Veterans Affairs, and Fannie Mae and Freddie Mac.
It is true that, unlike the banks, nonbanks are not financially backstopped by the federal government — either through the Federal Deposit Insurance Company, or in 2008 through a massive Treasury bailout. But we think that is a good thing. Instead of a taxpayer safety net, nonbank lenders are subject to market discipline.
Nonbank lenders must meet financial soundness requirements of the warehouse lenders that fund their operations, and owners of nonbank firms put their net worth on the line every day, taking on financial responsibility for loan repurchases and indemnifications.
As Congress and the regulators formulate mortgage policy, we think it is important that they keep in mind the critical role that nonbank mortgage lenders play in serving consumers and in protecting against industry concentration. That perspective will help them create policies that support the vitality of our housing markets and strength of our economy.
Scott Olson is executive director of Community Home Lenders Association.