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Non-Bank Mortgage Companies Pose Risks to Financial Stability, FSOC Says
(Bloomberg) — Nonbank mortgage companies, which increasingly dominate the sector, pose unique risks and vulnerabilities that could weaken financial stability, according to a new report from the Financial Stability Oversight Board.
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The FSOC released its first study on Friday on the threats posed by non-bank mortgage companies, which have escaped the strong regulation reserved for traditional banks, despite having displaced them in the market. In 2022, nonbank institutions originated about two-thirds of mortgages and paid off most of them.
The sector’s specialized business model makes companies vulnerable to changes in housing prices, interest rates and default rates, according to the report. Nonbank institutions are more reliant than traditional lenders on the value of mortgage servicing rights and may have high leverage, short-term financing and operational risks, the FSOC found.
“Simply put, the vulnerabilities of nonbank mortgage companies can amplify shocks to the mortgage market and undermine financial stability, and the board has now laid this out in detail for the first time,” said Treasury Secretary Janet Yellen, who leads the FSOC.
The FSOC report made several recommendations to address the sector’s risk. One is for Congress to establish an industry-financed fund to provide liquidity to failing nonbank mortgage servicers, allowing their operations to continue until servicing obligations can be transferred in an orderly manner.
The study also suggested that Congress consider giving the Federal Housing Finance Agency and Ginnie Mae more authority to help manage nonbank counterparty risk—and that Ginnie Mae expand a program so that it could become a more effective liquidity support mechanism.
The report recommended that state regulators require resolution planning from large non-bank mortgage companies.
“Of course, these companies are not subject to the same financial requirements as banks, although they pose very similar and sometimes greater risks,” said Rohit Chopra, head of the Consumer Financial Protection Bureau. “They’re not diversified, they don’t keep that much cash on hand, they borrow heavily from banks that can pull their funding at any time.”
Footprint expansion
Biden-era regulators have long argued that supervision has not kept up with nonbanks as their presence in the financial sector has expanded and their ties to traditional lenders have become more complex.
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Nonbank lenders flooded the home loan space in the wake of the Great Financial Crisis as the country’s largest banks pulled back, especially on loans with lower down payments. Last year, nonbank institutions including United Wholesale Mortgage LLC and Rocket Cos. dominated the top 10 mortgage lenders by origin, based on data from Inside Mortgage Finance.
Although nonbanks have taken the lead from banks, no company had more than 7.4% of residential mortgage originations last year, based on data from Inside Mortgage Finance.
“These vulnerabilities affect companies of all sizes, and in times of stress, many mortgage servicers are likely to face problems,” Federal Reserve Chairman Jerome Powell said during the FSOC meeting. “We are not dealing with a few very large companies that individually pose a systemic threat.”
In November, US regulators charted a course to label non-banks as systemically important financial institutions.
Read more: US paves the way for more financial giants to get Fed oversight
Friday’s report makes no specific mention of potential SIFI designations for non-bank mortgage lenders. But this tool is not out of the question and the report could lay the groundwork for a later decision, according to people familiar with the matter.
–With assistance from Viktoria Dendrinou.
(Updates starting in first paragraph with report details, comments from officials.)
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