The years since the housing crisis have been marked by a tug of war between two conflicting ideas.
A vibrant lending market is critical not just to the housing sector, but to the entire economy, analysts, politicians, industry groups and regulators believe. But it’s just as imperative to guard against the kinds of risks that blew up the financial system in 2008.
Yet for all the efforts put forth on both fronts in the past few years, many industry participants believe that natural evolutions in the lending markets during that time may be creating conditions that could set off a convulsion similar to the one that wreaked havoc in 2008.
The concern is over liquidity, the same issue that brought “too-big-to-fail” banks to their knees in 2008. But now, in a changed market, that familiar concern has a slightly different face.
Since the crisis, banks have increasingly stepped away from mortgage lending. They are still paying up for bubble-era offenses and feel newly-imposed regulations are so strict as to be punitive. Banks made about 52% of all home loans in 2014, down from 74% in 2007, and many analysts think that share is going to go much lower.
Also read: Big banks are fleeing the mortgage market
Companies often called “nonbanks,” or “mortgage bankers,” like Quicken and Nationstar NSM, +1.46% , are stepping into that void. Nonbanks are held to the same standards as banks for lending and servicing mortgages, but don’t have many of the same resources banks do.
If an economic downturn caused a rash of borrowers to be unable to make payments, banks low on cash could tap emergency funds through the Federal Reserve. And their deposits are protected by the Federal Deposit Insurance Corp.
But more to the point, if nonbanks come up short on liquidity, they must turn to banks for short-term financing – and it’s not clear whether such requests would be honored.
“Non-banks are at a structural disadvantage to banks,” said Chris Whalen, head of research at Kroll Bond Rating Agency and a long-time bank analyst. “The people running these businesses know what they’re doing. But no matter what they’re doing, there’s someone sitting at Wells or Citi who can pull the plug.”
Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch, “I think it’s a very serious concern, not an issue for tomorrow or next year, but this should be addressed and resolved to everyone’s satisfaction because in the next crisis it will be key. In a crisis, when investors are panicked, there are going to be very reluctant to extend credit to smaller, less-established institutions, including many of the non-banks.”
Big shifts in lending since the last crisis are driving that concern. A much larger share of mortgages are now backed by the Federal Housing Agency, rather than Fannie Mae and Freddie Mac. And nonbanks make up two-thirds of FHA lending.
| Date | Event |
| 2006 | Countrywide Home Loans is #1 mortgage originator, with $175.3 billion and nearly 7% market share. Top originators also included American Home Mortgage, Inc., New Century Mortgage Corp, Fremont Investment and Loan. Nonbanks account for 36% of originations. |
| 2007 | American Home Mortgage and New Century file for bankruptcy |
| 2008 | Countrywide is sold to Bank of America, Fremont is sold to CapitalSource Inc. |
| 2008 | Nonbanks originations hit low of 23% |
| 2010 | Dodd-Frank Wall Street Reform and Consumer Protection Act is signed into law |
| 2013-2014 | Over a nine-month period, big banks including J.P. Morgan Chase, Bank of America, and Citigroup strike deals with the government over bubble-era misdeeds, totaling over $16 billion. Such settlements have continued, and the government has also started to pursue lenders for post-crisis wrongdoing. |
| 2014 | Nonbank originations make up 43% of the market |
FHA was created during the Depression to serve as a lender of last resort to the mortgage market, Zandi noted. If nonbank lenders freeze up, “then that very important safety valve from the housing market would shut down.”
Ted Tozer, president of the Government National Mortgage Association, or Ginnie Mae, the mortgage agency that backs loans sold by FHA, is widely considered the first industry participant to sound the alarm about a potential liquidity problem in the future.
“My big concern is starting to have a contagion, similar to 2008, where people quit lending to each other and at that point the whole system had issues because no-one knew who to lend to,” Tozer said in an interview. “My concern is not Quicken failing, my question is, [what if] all of a sudden mortgage bankers are seen as being a higher credit risk? I’m worried about that chain reaction crisis of confidence.”
A particular challenge is that while each government mortgage agency sets its own funding requirements for lenders, there’s no system-wide means of addressing the liquidity issue in what’s sometimes referred to, probably unfairly, as the “shadow banking system.”
As Tozer has started to raise those questions, he says he’s finding an increasingly receptive audience. “Initially when I was talking about it, a lot of the independent mortgage bankers were concerned because they perceived I was saying they were doing something wrong. Now the thought has evolved to understanding it doesn’t mean they’re inferior, it’s just a limitation about their business model. More and more people are talking less emotionally now.”
But in an industry that often feels over-regulated, there’s still some pushback.
“We feel very, very comfortable about our capital position, our liquidity position,” said Bill Emerson, CEO of the top nonbank originator, Quicken Loans. “We came out of 2007-2008 and we continue to grow. When I think about access to governmental funds, history hasn’t proved that that’s been a great solution for anyone.”
Most mortgage market players want more clarity from regulators, Emerson said, but not necessarily altogether new regulations. The perception that there’s too much regulation now is keeping lending too restrictive, he added.
Andrew Chang, chief business development officer at #2 nonbank lender PennyMac PMT, +0.53% , noted in an email that “virtually all” the company’s mortgage business is in loans guaranteed by Fannie, Freddie, or Ginnie, all of whom set liquidity requirements.
David Stevens, president of industry group Mortgage Bankers Association, is more blunt. “I disagree with Ted and I think it’s creating a heightened level of tension that doesn’t help,” he said.
There are more players in the mortgage market now, Stevens said, and that distributes risk much more broadly. And he points out that many nonbanks sailed through the financial crisis that cratered banks like Washington Mutual.
“Liquidity can be a problem for the financing market broadly in any kind of credit event but Ted is raising concerns about an event that doesn’t exist. In the worst climate for credit in history we didn’t have a problem,” Stevens said. “Non-banks have always had a share of the market. I think Ted is exacerbating the concern on this issue beyond what’s reasonable.”
Tozer doesn’t question nonbanks’ business model or financial management practices, but points out that there’s been a huge influx into the market of new players. “Some of the mortgage bankers have not gone through recessions when unemployment goes up and there are delinquencies,” he said.
Whalen concedes that nonbanks came through fine in 2008, but believes there’s no way to apply past precedent to future panics. “It’s not a problem until it is,” he said. “That inflection point can come real quick.”
