This piece is a follow-up to the article “America’s Mortgage Market Still Broken” that was posted earlier this week.
It used to be, prior to the nightmarish financial/housing crisis in 2008, that mortgage market kings were banking juggernauts such as JP Morgan Chase, Bank of America, Wells Fargo and Citigroup. Today, the new mortgage market kings are nonbanks. What is a nonbank? A financial institution that does NOT offer both lending and depositing services and, therefore, a financial institution that does NOT have access to assets and liquidity from deposits that a bank has.
Today’s mortgage market kings are Quicken Loans, LoanDepot, Freedom Mortgage and Caliber Home Loans. Just these four nonbanks have issued nearly 50% of all Freddie Mac and Fannie Mae mortgages in today’s home lending markets. Ten years ago, these nonbanks issued only 8% of those mortgages.
To make sure nonbanks have enough liquidity to protect themselves from defaulted loans, nonbanks often borrow money on a short-term basis from mortgage servicers such as banks. (Reread “America’s Mortgage Market Still Broken” again to remind yourself how this works.)
It turns out that Freddie Mac is now in the business of providing nonbanks this kind of credit and this kind of financing. Although this new policy of extending lending power to nonbanks has not been publicly announced, the Chief Executive Officer of Freddie Mac, Don Layton, said, “…this credit fills in a gap not served by the private market and that Freddie Mac’s risk exposure won’t increase…if it works you’ve got another lender in the marketplace.”
Some industry trade groups and regulators are not happy about Freddie Mac’s entry into angel investing with nonbanks. Will Freddie Mac target its financing towards the largest lending servicers? Will Freddie Mac charge comparatively lower interest rates to larger nonbanks and therefore put smaller nonbanks at a disadvantage?
Michael Fratantoni, chief economist with the Mortgage Bankers Association, indicated that he had no clue as to who and/or which nonbank might be eligible for credit lines from Freddie Mac. “There has been no transparency associated with this (move by Freddie Mac)…we’re concerned around the un-leveling of the playing field… between larger and smaller lenders.”
Regulators are worried overall that nonbanks may not be able to perform in a downturn if/when borrowers begin defaulting on their home loans due to not having enough resources. Nancy Wallace, a n economics professor at the University of California at Berkeley and co-author of a study on nonbanks by the Federal Reserve and UC Berkeley’s Haas School of Business, said, “Nonbanks are undercapitalized and rely too much on borrowed money. Accessing credit lines from Freddie Mae does not solve this problem.”
Fannie Mae is not, however, loaning any money to any nonbank entities. Essentially, the two government sponsored home loan enterprises are not identical twins. Renee Schulte, Fannie Mae’s senior vice president for capital markets, said, “Fannie Mae is not following Freddie’s lead here. We think there is plenty of private capital out there for the financing of servicing rights.”