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Nonbank mortgage providers like Rocket Mortgage could make the next recession worse, federal regulators have warned.
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U.S. officials worry that the next recession could become even more intense due to cascading failures in the mortgage industry due to plummeting home prices, frozen financial markets and soaring delinquencies.
The U.S. Financial Stability Oversight Council, a SWAT team of financial regulators formed after the 2008 financial crisis, warned Friday about nonbank mortgage companies, an increasingly influential part of an industry that has largely escaped scrutiny. rang.
Unlike traditional banks, non-bank mortgage companies are highly exposed to fluctuations in the mortgage market, rely on funds that can be depleted in times of stress, and rely on stable deposits as a safety net. do not have. And unlike banks, these companies are less regulated at the national level.
FSOC believes these unique vulnerabilities pose a risk of creating a domino effect in future crises where multiple mortgage lenders fail, borrowers are locked out of the mortgage market, and the federal government remains accountable. warned that there would be.
“Simply put, the vulnerabilities of nonbank mortgage lenders can amplify shocks in the mortgage market and undermine financial stability,” Treasury Secretary Janet Yellen, who chairs the FSOC, said in the report. .
Federal regulators are calling on states and Congress to take steps to address the risks posed here, including creating an industry-funded backstop to ease the disruption that would result if a mortgage company failed. There is.
Despite their shaky terminology, nonbank mortgage companies are important players in originating most home loans in the United States today. These include major brands such as Rocket Mortgage, PennyMac, and Mr. Cooper.
As of 2022, nonbank mortgage companies originated approximately two-thirds of U.S. mortgages and held servicing rights for 54% of outstanding mortgages, according to FSOC. This is a significant increase compared to his 2008.
In fact, non-bank mortgage servicers hold the rights to collect on approximately $6.3 trillion in outstanding government mortgage loans (70% of the total).
The FSOC said non-bank mortgage companies had “vulnerabilities” that could “amplify and transmit the impact of shocks to mortgage markets and the broader financial system.”
For example, if house prices collapse in a future crisis, mortgage companies may simultaneously incur losses and face financial difficulties, leaving them unable to make necessary payments to investors on behalf of distressed borrowers. FSOC said it will be difficult. These challenges will be exacerbated by these companies’ relatively high levels of debt.
Regulators say this pressure on nonbank mortgage companies could harm borrowers seeking mortgages and create obligations to the federal government.
Yellen and her colleagues on Friday called on state regulators to tighten requirements and standards for nonbank mortgage companies, including requiring them to develop ways to safely wind down operations during a crisis. Ta.
To address liquidity pressures under stress, regulators have asked Congress to consider legislation that would give Ginnie Mae new powers to expand support background programs.
Additionally, regulators said Congress should consider establishing a fund funded by nonbank mortgage companies to “provide liquidity to nonbank mortgage servicers that are in or near bankruptcy.” Stated.
In response, the Mortgage Bankers Association, an industry group, said it supports FSOC’s goal of a “safe, stable and sustainable financial services market” but called some of the recommendations “unnecessary.” Ta.
“Years of punitive capital controls have forced depository institutions to participate in the mortgage lending and servicing market,” MBA President and CEO Bob Bruksmit said in a statement Friday. “Willingness and ability are already limited.” “While we support national standards for capital and liquidity requirements, layering duplicate supervisory requirements and regulators on a highly regulated market would add significant cost and complexity. Become.”
The ABA warned that managing these changes could reduce competition and increase borrowing costs.
Scott Olsen, executive director of Community Home Lenders of America, another industry group, said the FSOC report does not suggest a significant risk to taxpayers and that it does not pose a risk to the financial system as a whole. He said it was only limited.
“Given the current affordability challenges for homeowners, CHLA does not want regulators to overreact to this limited risk with regulations or fees that limit access to mortgage credit,” Olsen said in a statement. I hope so.”
Even some regulators have concerns about the new FSOC plan.
Brandon Milhorn, president and CEO of the Conference of State Bank Supervisors, warned in a statement Friday that the recommendation to create a new liquidity fund is “premature at best.”
“Before considering such a proposal, Congress should require significant further study and analysis of the potentially dramatic unintended consequences of this recommendation,” Milhorn said. “We are concerned that this recommendation could have a negative impact on the nonbank mortgage market, particularly for low- and moderate-income borrowers, communities of color, first-time homebuyers, and veterans. There is.”
But Patricia McCoy, a professor at Boston University School of Law, warned that non-bank mortgage companies’ reliance on short-term loans for funding makes them “vulnerable to failure” if borrowing rates soar or loans dry up. did.
“Nonbank mortgage companies are thinly capitalized and are more susceptible to failure if they lose funding or if mortgage defaults spike,” said McCoy, a former mortgage regulator. “Since the beginning of 2007, we have seen non-bank mortgage companies fail for these very reasons.”
