Washington Post, September 21, 2018: Washington Post: Non-bank lenders are back and even bigger than before
In the years leading up to the 2008 financial crisis, mortgage lenders fueled the housing bubble by issuing loans to high-risk borrowers. But instead of funding the loans by tapping deposits, many lenders borrowed against lines of credit — and then sold the mortgages to investors. Then the crisis hit, and many lenders collapsed. Now the housing market is strong again, and non-bank lenders have quickly become the largest source of mortgage lending in the country.
More than half of all mortgages issued last year came from non-bank lenders, up from 9 percent in 2009 and higher than non-banks’ market share before the financial crisis, according to Inside Mortgage Finance, a publication that tracks the residential mortgage market. Six of the 10 largest mortgage lenders in the United States are non-banks.
Non-bank lenders are not subject to the same rigorous, and expensive, oversight that the Dodd-Frank act imposed on traditional banks in the aftermath of the housing crash. Scrutiny of most non-banks is further reduced by virtue of their being privately owned, and technology has helped level the playing field in mortgage lending.
About 85 percent of FHA mortgages were originated by non-bank lenders in 2016, up from 57 percent in 2010. Non-bank lenders are serving many black and Latino borrowers, who tend to have less inherited wealth and are more likely to need a loan that requires a smaller down payment. Instead of tapping customer deposits to make mortgage loans, non-banks fund loans using credit. Ultimately, they sell the mortgages to investors around the world, often retaining responsibility for collecting payment (and receiving fees for doing so) but no longer owning the mortgages or receiving interest income.
The lines of credit non-bank lenders tap today could be revoked if the firms providing the credit become concerned about the lenders’ financial health. And without credit, many lenders could be forced out of business because they wouldn’t have enough capital to issue new mortgages or to meet other financial obligations. Without credit, many lenders could be forced out of business because they wouldn’t have enough capital to issue new mortgages or to meet other financial obligations.
Some consumer groups are concerned that non-bank mortgage lenders are not receiving enough surveillance because they are privately held companies. They say the lenders, which are regulated at the state level, should be monitored more closely. Consumer safeguards and higher underwriting standards put in place since the financial crisis have helped scale back the risk in the housing market. All mortgage lenders are required to take steps to ensure that borrowers can afford their loans, such as verifying income, assets and employment. Mortgage companies are also required to work with consumers and give them more chances to stay in their homes and avoid foreclosure. Mortgage default rates are the lowest they’ve been in more than a decade.
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