What the CHLA report on independent mortgage banks reveals

This week, the Community Home Lenders of America released its annual IMB report.

This is the first IMB report issued since the Community Mortgage Lenders of America and the Community Home Lenders Association merged in August. The combined organization provides more resources, represents more members, and carries more influence in Washington — as the distinctive voice and advocate for small and mid-sized independent mortgage banks, also known as IMBs.

This year's IMB Report continues to chronicle the ascendancy of IMBs as a market force. IMBs picked up the slack as many large banks abandoned mortgage lending or imposed credit overlays. IMBs now originate 64% of all mortgage loans, including 91% of FHA and 88% of VA loans, and IMBs now issue 90% of Ginnie Mae securities.  

Our report also cites statistics from independent groups like the Urban Institute and the Greenlining Institute documenting the fact that IMBs continue to clearly outpace banks in providing access to mortgage credit for minorities and other underserved borrowers. 

But there are also hard realities about current market conditions, and IMBs clearly face a challenging economic environment. Homeownership affordability is threatened by a steep increase in mortgage rates and rising home prices. The result is a sharp decline in mortgage volume and profit margins as lenders chase fewer loans.

The impact of these headwinds is reflected in a spate of stories across all mortgage sectors detailing massive industry layoffs, firms struggling to maintain profitability, some lenders shuttering entire distribution channels, consolidation and even few IMBs exiting the business.  What is important is the takeaway from these challenges and developments.

First, it is critical to make key distinctions between large IMBs and the typical small and mid-sized IMBs that CHLA represents. The early evidence is that smaller IMBs are better placed to weather the challenges. Larger IMBs that went public, that are portfolio lenders or that participate in the private label securities market, are more susceptible to financial hardship in this market.

Our report serves to dispel the myths perpetrated by some in Washington that IMBs represent some great new financial risk to the system. As our report documents, small and mid-sized IMB lenders represent almost zero taxpayer risk and almost zero systemic risk.  The business model of smaller IMBs is a big factor in this. Smaller IMBs predominately originate federally backed mortgage loans (FHA, VA, GSE).  So, rising defaults or foreclosures don't have the financial impact on them as they do to portfolio lenders and large servicers. 

Second, our IMB report also rebuts another myth — that IMBs are in sufficiently regulated — by presenting hard facts that IMBs actually have much stronger consumer protections than banks, noting that unlike IMBs, banks are exempt from basic loan originator qualifications requirements and 97% of banks are exempt from CFPB supervision.

The key is what comes next. CHLA commends FHA and Fannie Mae and Freddie Mac for generally pursuing policies that emphasize access to mortgage credit. Examples are FHA's recent underwriting changes to student loan debt and FHFA's actions last year to repeal the pernicious PSPA restrictions on higher risk loans, on second home and investor loans, and on small lender access to the GSE cash window.

However, we recognize the pressures on policymakers to respond to early signs of adverse economic circumstances by pulling in. No one wants to be accused of ignoring warning signs, like policymakers did during the subprime mortgage crisis.

Our IMB Report also points out that the current environment is not at all like 2008.  So, now is not the time to follow procyclical policies of constricting mortgage credit or dramatically raising financial requirements for participants in federal agency mortgage loans.

Increases in both mortgage rates and home prices create significant challenges for homeownership affordability, particularly for minorities and other underserved borrowers. That is why CHLA continues to lead the call for FHA to cut annual premiums and to end its life-of-loan policies.  This is also why CHLA has called on Fannie and Freddie to modulate its LLPA increases on higher-balance loans and second-home loans, by exempting middle income borrowers buying middle- price homes in high-cost areas.

The other critical imperative is preserving competition and choice for consumers — by maintaining a broad base of IMB lenders and servicers.  A good example of the harm that can come to consumers by limiting choice occurred in the Spring of 2020 when forbearance was mandated. Big aggregators ran for the hills or imposed steep price increases on consumers.  It was the broad base of IMBs that directly access secondary markets through Ginnie Mae and the GSEs who ensured that consumers had broad access to loans at affordable mortgage rates and terms.

Our IMB report acknowledges CHLA's appreciation that Ginnie Mae and FHFA listened to market participants and scaled back earlier proposed strict financial requirements which could have thinned out the base of lender/servicers serving those programs. We still think there is work that could be done by Ginnie Mae to ameliorate the potential sale and price decline of MSRs resulting from their new risk-based capital requirements.

But, overall, the 2022 CHLA IMB report lays out a strong case why federal policymakers should emphasize access to mortgage credit as their top policy priority, and why small and mid-sized IMBs stand ready, willing and able to continue their effective efforts to make that objective a reality.