Nonbank financial firms spent years lobbying against tougher regulation and stricter capital requirements, arguing that their emerging dominance in mortgage lending didn’t pose a risk to the financial system.
Now, many of those companies say they are in desperate need of a bailout to stave off bankruptcy and a potential collapse of the U.S. housing market.
Any rescue might not come quickly, as regulators are holding off on providing additional help to see if policies already put in place ease the industry’s expected cash crunch, according to people familiar with the matter. That could lead to anxious moments for
Federal mortgage watchdogs didn’t predict a pandemic like coronavirus grinding the economy to halt, but many of them did see a potential nonbank liquidity crisis coming. Their efforts to impose more safeguards ran aground against mortgage-industry resistance and bureaucratic reticence to slow the fastest growing source of U.S. home loans, according to industry experts and former government officials.
When government-owned
Shaky Foundations
The rise for nonbanks in the mortgage sector and now their pain shows the shaky ground on which much of the post-crisis financial world has been built. Shadow lending has soared, with firms outside the oversight of the Federal Reserve and other regulators helping to fuel a decade-long credit boom. These companies lack access to many of the government subsidies and funding sources that make banks more stable.
Mortgage servicers Mr Cooper,
While the 2008 housing crash was caused by risky mortgages and fraud, the 2020 crisis isn’t the result of bad decisions by lenders. Loads of workers have lost jobs as a result of coronavirus, putting their ability to make loan payments at risk. That point hit home Thursday when the Labor Department reported that a record 6.6 million Americans applied for unemployment benefits last week.
As part of the $2 trillion stimulus bill passed in March, Congress mandated that mortgage servicers allow borrowers to delay payments on government-backed loans for as long as a year. Moody’s analytics Chief Economist
Under agreements with Ginnie,
Unfair Blame
“I don’t think there is a liquidity standard that could have dealt with this kind of ramp up” in expected delayed payments, said Mills, whose Washington-based group lobbies for the industry.
Should servicers start to go under, federal agencies will have to rush to find other companies to take over the loans. Borrowers could have more difficulty working with their mortgage companies on loan modifications to alleviate some of the pain of the pandemic. Others will have fewer places to go to find new loans.
If not solved, the epicenter of the nonbank crisis will be with Ginnie, which is part of the
While nonbanks service about two-thirds of all mortgages, they handle nearly nine out of ten mortgages backed by Ginnie, according to the Urban Institute Housing Finance Policy Center.
Banks Retreat
After the financial crisis, large banks like
As the banks retreated,
Freedom Chief Executive Officer
“This is not like a flood in Missouri,” Middleman said. “This is everywhere all at once.”
Repeated Warnings
Over the past few years, academics and government regulators have sounded alarms that nonbanks don’t have the capital or liquidity to withstand an economic downturn. A 2018 paper by researchers at the
The MBA, the industry trade group, released its own white paper in 2019 calling the researchers’ warnings “overstated.”
In December, the Financial Stability Oversight Council said nonbanks were a potential source of danger, a warning met with derision by some nonbank mortgage firms.
“When it comes to loan servicers, the FSOC and regulators have spent years fretting about supposed hazards that do not really exist,” Freedom’s Middleman wrote in a January post on the MBA website. He said FSOC’s contention that nonbank servicers were a systemic risk was “bizarre,” though he did write that the government could help nonbanks find more stable sources of liquidity.
Regulatory Inaction
But while regulators seemed well aware of the potential issues, little was done to fix them.
In 2017 and 2018, Ginnie required some of its largest lenders to present liquidity plans showing what lines of credit and capital they could draw on in a crisis. While some nonbanks appeared strong, others had credit lines that could be pulled by their lenders at any time for any reason, said Bright, making them poor funding sources during a downturn.
Ginnie also asked lenders to subject themselves to stress tests, using a hypothetical economic calamity much less severe than the one being experienced today.
With the bulk of its servicers facing a cash crunch, Ginnie late last month said it would activate a disaster-relief program that lets servicers apply to have Ginnie advance payments to bondholders itself. But that program won’t cover other parts of a mortgage payment, such as taxes, insurance and homeowners association payments.
Rescue Inevitable?
Now, nonbank mortgage firms say that many of them will go under if they don’t get a new lending facility from the Treasury Department and Fed.
Former Ginnie president
“We need to find a solution so we’re not going through this every time we have some sort of crisis,” Tozer said.
(Updates with share prices in seventh paragraph)
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