According to a recent study by a senior fellow and researcher at the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School, the non-bank’s market share of agency purchase mortgage originations has gone from 27% in 2012 to 48% in 2014. Quite a jump – if I may say so myself.
What is contributing to this jump? Many believe it is the result of the new Dodd-Frank rules, coupled with an increase in enforcement actions, which have limited many banks participation in the mortgage market.
This provides more opportunity for the non-banks to capture marginal loans. Because of the perceived risks from the QM & ATR rules, the looming challenges of the new TRID rules, and the constant threat of enforcement actions from CFPB, FHA, DOJ and FHFA, many banks have decided to sit on the sidelines and take a wait and see attitude when it comes to what may be considered riskier lending. If you don’t make them, then nothing bad can happen. Maybe!
The non-banks have embraced the new low down payment loan programs offered through Fannie and Freddie while increasing their share in the FHA lending arena which is an area where many banks have pulled back. It is being reported that the median credit score for an FHA borrower is 667 for the non-banks versus a 682 for banks. Some of the larger non-bank FHA originators are down below 660. It seems that banks choose not to take the additional risks regardless of the FHA insurance. Maybe they’re worried FHA and DOJ will come after them under the False Claims Act for a minor slip up, as they have done to so many other lenders. This is something that all lenders should be concerned about.
The thing is that these non-bank lenders are not holding or insuring these loans. The conventional loans back securities purchased by Fannie or Freddie. The FHA loans go into Ginnie securities and the loans are insured against default by FHA. So if these loans fail who pays? Whoever is holding the loans and the FHA insurance fund. Not good for Fannie, Freddie, FHA, the economy, the taxpayers or the industry. It will be bad for everyone. Real bad.
Hopefully, lenders are carefully underwriting these loans to comply with not just the laws but the secondary market and FHA requirements. As importantly, Fannie, Freddie and FHA need to be carefully monitoring lenders and their loans to identify potential problems before we have another catastrophe. Let’s face it, as long as Fannie & Freddie will buy the conventional loans, and FHA will insure the government loans, lenders will continue to originate them. That’s what they do. But, will they do it responsibly?
Lenders, both bank and non-bank, need to carefully monitor their loan activity to ensure the loans being originated today are loans that will perform tomorrow. If not, their profits and their existence may be short lived.