Non Bank Lender Growth Cautions Federal Policy Makers

NON BANK LENDER GROWTH CAUTIONS FEDERAL POLICY MAKERS

Non-bank lenders continue to emerge as dominate players in the mortgage lending industryalmost doubling their market position from 2012 to 2014.  These non-bank lenders are being eyed by policymakers, causing Government Sponsored Enterprises (GSE) such as Freddie Mac and Fannie Mae to modify their non-bank standards in May.  

Non Bank Lender Growth

The attraction to non-bank lenders for consumers, according to a June 1 paper published by Marshall Lux and Robert Greene from the Harvard Kennedy Massavar-Rahmani Center for Business and Government is largely due to granting mortgages to lower FICO score applicants.  According to the study, in the last quarter of 2013, the median FICO score of FHA insured borrowers was 675 at non-banks compared to the 685 at banks.  Compared to the last quarter of 2014, non-bank lenders loaned to borrowers with a 667 score while traditional lenders loaned to FICO scores of 682.  Technology plays a vital role in the growth of non-bank lending.  Borrowers are attracted to on-line applications, receiving quick mortgage approvals and enjoy highly rated customer experiences.  Non-banks costs the consumer less and the non-bankbusiness structure engages regulators. No wonder the non-bank mortgage business is booming!  Today, even if your FICO score is under 700, whether you are searching for golf communities in Southwest Florida or beachfront condos in Southwest Florida, non-bank lenders just might be able to help. 

The FHA insuring these loans is what has driven the Fed to review the insurance requirements.  Astonishing statistics for first part of 2015 indicate over 60% of FHA mortgage originations were by non-bank entities to borrowers of higher risk compared to 30% in 2012.  Low income, low down payments contribute to risk of default and can severely contribute to housing market downturns. Jack Guttentag, Professor at the Wharton School of Business noted that because FHA mortgage insurance premiums are not linked to credit scores, low-income borrowers are accepting less favorable terms, and as long as FHA insurance can be secured, the loans are made. 

There is no doubt that non-bank companies present a threat to the GSE’s.  As technology continues to affect the mortgage industry and borrowers are getting mortgages under the non-bank business model, adjustments will continue.  Modifying FHA insurance guidelines to level the playing field between non-banks and traditional lenders is just the beginning.  Non-traditional bank financing can help you purchase in all of Southwest Florida including luxury properties in Naples, Marco Island, Bonita Springs and Estero.  

Certainly non-banks, just like depository institutions that originate or service mortgages, pose a counterparty risk to the GSEs. However, bank-like standards for non-banks, when the riskiest non-banks appear to be the largest and best capitalized, will only marginally mitigate this risk.  Truly improving both the vitality and stability of the U.S. mortgage market necessitates the more politically difficult task of reforming risk channels – that means reforming the GSEs and, more important in the context of non-banks, reforming FHA insurance guidelines, which appear to be enabling some non-banks to engage in lending to subprime borrowers while the government bears the risk.  Regulatory coordination is also critical to mitigating unintended competitive advantages to non-banks brought about by the existing regulatory environment, such as capital rules creating a competitive advantage for non-banks.  OIRA review and cost-benefit analysis of federal financial rulemakings could help ensure that the sometimes-conflicting objectives of FHFA, CFPB, banking regulators, and state regulators are better balanced in such a way that does not bring about regulatory arbitrage or unintended outcomes.

Written by, Kathy Zorn

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