The past decade was a period of extreme turbulence for the mortgage industry. The nation recovered from the worst recession since the Great Depression. The creation of the Consumer Financial Protection Bureau (CFPB) and the passage of the Dodd-Frank Act resulted in a new regulator and a myriad of new mortgage regulations.
During this time, the industry witnessed a number of important federal policy battles between large and small mortgage lenders, and between independent mortgage banks (IMBs) and traditional banks. This also was a period of great opportunity for IMBs, marked by their remarkable ascent as the dominant source of affordable mortgage financing.
After 2008, many banks exited the mortgage business or imposed credit overlays, prioritizing higher credit-score borrowers who buy other bank products. Independent mortgage banks picked up the slack, however, because mortgage lending is all that these institutions do. IMBs, or nonbank lenders, are nondepository institutions that focus exclusively on originating and servicing mortgages.
Statistics confirm how vital IMBs have become for consumer access to affordable mortgage credit. From 2010 to 2016, the independent mortgage bank share of Federal Housing Administration (FHA) loans grew from 57% to 85% while these institutions’ share of Ginnie Mae mortgage-backed securities grew from 18% in 2009 to 78% in 2018, according to Community Home Lenders Association data.
A paper released in May 2018 by the Center for Responsible Lending explained that “nonbanks have played an important post-crisis role in expanding access to credit for borrowers with lower credit scores and smaller down payments.” This paper documents the fact that nonbanks serve higher percentages of minorities and other types of underserved borrowers.
Independent mortgage banks — particularly smaller, community-based ones — also provide more personalized servicing than nationwide servicers since they are more likely to be located in and have a stake in the communities where the lending occurs. Complaints about big-bank servicing during the 2008 financial crisis were legendary — significantly greater than what is being seeing now during the COVID-19 pandemic when IMBs have a much larger market share for servicing.
With the ascent of IMBs, the challenges have grown in explaining to federal policymakers what these institutions are and how critical they are in facilitating access to mortgage credit. Unfortunately, there have been claims by some think tanks that IMBs pose the next great risk to our financial markets. Some members of Congress have come to believe that nonbank lenders are not adequately regulated. Combined, this creates a real risk that the same lenders that abandoned mortgage markets during the previous decade will try to use these scare tactics about independent mortgage banks to persuade federal policymakers to pile unnecessary regulations on IMBs, thus making it harder for these institutions to compete — to the detriment of borrowers.
The simplest way to preserve the essential pro-consumer role that IMBs play in the markets in the face of these false narratives is to educate federal policymakers about the facts. For one, independent mortgage bank servicing requirements with respect to net worth and liquidity are similar to bank requirements. And IMB lenders are subject to appropriate net worth requirements by state regulators. IMBs don’t pose a risk to federal taxpayers, unlike banks whose deposits are backed by the Federal Deposit Insurance Corp (FDIC).
With regard to consumer-protection requirements, IMBs are significantly more regulated than banks. In addition to being supervised by every state in which they do business, IMBs are overseen by the CFPB. Meanwhile, 99% of banks (or those with less than $10 billion in assets) are exempt from CFPB supervision. Additionally, IMBs have extensive mortgage originator licensing requirements such as testing, independent background checks and continuing education, while bank originators are exempt from these rules.
Dodd-Frank established a provision that all mortgage originators must be qualified. No one knows if the thousands of bank originators would pass or fail the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act test since they’re not required to take it. Consumers deserve the same high level of consumer protection for any mortgage originator they do business with. Independent mortgage banks deserve a level playing field with respect to originator licensing and qualification requirements.
Another area that is vitally important to independent mortgage banks is FHA lending, a critical tool that helps IMBs serve all qualified mortgage borrowers. FHA policies should be balanced and pricing should be based on financial performance — not on some arbitrary objective of increasing private lending regardless of the adverse consequences to consumers.
FHA took a good first step in 2015 by reducing annual mortgage insurance premiums by 50 basis points. More steps are in order, such as ending its life-of-loan policy, which since 2013 has required homeowners to pay for mortgage insurance for the entirety of their FHA loan. The agency also should look at ending penalties for minor failures to meet servicing deadlines.
Another top priority is continued broad IMB issuer participation with Ginnie Mae. The primary reason consumers continue to enjoy a competitive market for FHA loans in good times and bad is that hundreds of independent mortgage banks directly access securities markets as Ginnie Mae issuers.
Not all issues break down along bank and non-bank lines. Some, such as those involving Fannie Mae and Freddie Mac, split along small-lender versus large-lender fault lines. Reform of the government-sponsored enterprises (GSEs) poses a risk to small, community-based lenders, particularly if outstanding issues are resolved through congressional legislation in which large Wall Street companies use their power and resources to tilt laws in their favor.
One of the more encouraging developments in the GSE-reform debate has been the formation of an informal group called the Main Street GSE Reform Coalition. This informal coalition is comprised of small lender groups as well as housing, consumer and community groups.
Some groups have defended the sweep of GSE profits, which required Fannie and Freddie to turn over their profits to the U.S. Treasury to pay for the federally funded housing-crisis bailout. The coalition, however, saw this an obstacle to GSE recapitalization and a risk to consumers as it took away reserves that could be used to avoid fee increases during downturns such the current health-related crisis. Last year, the coalition’s efforts came to fruition as the Federal Housing Finance Agency (FHFA) suspended the profit sweep.
Small lender groups also banded together to testify before the Senate Banking Committee in 2017. They opposed efforts by large Wall Street banks to authorize additional GSE guarantors, which would have opened the door for them to use their secondary market dominance to gain an advantage in the primary mortgage origination market (vertical integration). Concerted opposition was critical in beating back this approach, which holds great risk to consumers and smaller lenders.
A similar effort is needed going forward in regard to parity of guarantee fees. Issuers of mortgage-backed securities (such as Freddie, Fannie and Ginnie) charge these “g-fees” to lenders for the creation, servicing and reporting of a security. The current policy must be broadly applied and made permanent through a revision of the GSEs’ preferred stock purchase agreements, and through a rule carried out by their regulator, the FHFA.
Finally, the COVID-19 crisis will continue to pose special challenges. If you believed the Chicken Littles that claimed the sky was falling with respect to IMB risk, the congressional forbearance requirement and spiking default rates should have taken down a large number of independent mortgage banks. Instead, there has been some rough patches, but independent mortgage banks continue to thrive and be financially stable.
The COVID-19 outbreak has seen a proliferation of IMB employees working from home. States have accommodated this through temporary flexibility from SAFE Act branch-office requirements. IMBs also have demonstrated that their employees can work from home while safeguarding consumer protections. States should make these work-at-home flexibilities permanent.
Next year will no doubt present new challenges and new opportunities. The election will have a big impact on federal mortgage policies. The coronavirus will hopefully soon subside and the U.S. can go back to normal. Mortgage rates will not stay at historic lows forever and other changes can be expected, even if the specifics can’t be predicted.
For decades, community banks have used congressional outreach and a Main Street message to achieve federal policy victories. Community-based independent mortgage banks should do the same. Ultimately, it is consumers who will be the beneficiaries of this effort. ●