US officials are worried that due to a sharp drop in housing prices, a freeze in financial markets, and a sharp rise in default rates, the mortgage industry has experienced a series of failures, which may exacerbate the next recession. The US Financial Stability Oversight Council (US Financial Stability Oversight Council) issued a warning on Friday in an area that is increasingly influential in the industry but has largely escaped scrutiny: non-bank mortgage companies. The Commission is a financial supervisory SWAT team established after the 2008 financial crisis.
Unlike traditional banks, non-bank mortgage companies like Rocket Mortgage are largely affected by fluctuations in the mortgage market, the capital they rely on can dry up during times of stress, and they don't have stable deposits as a safety net. Furthermore, unlike banks, these companies are less regulated at the national level.
The FSOC warned that these unique flaws could have a domino effect in future crises, where multiple mortgage companies go out of business, borrowers are locked out of the mortgage market, and the federal government bears the consequences.
“Simply put, the vulnerability of non-bank mortgage companies could amplify the impact on the mortgage market and disrupt financial stability,” FSOC chairman and US Treasury Secretary Yellen said in the report.
Federal regulators are calling on states and Congress to take action to address the risks posed by this, including establishing an industry-funded support agency to mitigate the turmoil caused by the bankruptcy of mortgage companies.
Although a non-bank mortgage company is an unstable term, it has become an important player in most home mortgages in the US today. These include Rocket Mortgage, PennyMac, and Mr. Major brands such as Cooper.
According to FSOC data, as of 2022, loans initiated by non-bank mortgage companies accounted for about two-thirds of US mortgages and had service rights for 54% of the mortgage balance. This figure is a significant increase from 2008.
In fact, non-bank mortgage service agencies have nearly $6.3 trillion in institutional service rights to support outstanding mortgage balances, accounting for 70% of the total amount.
According to FSOC, non-bank mortgage companies are “vulnerable” and may cause them to “amplify and transmit shocks, which will affect the mortgage market and the broader financial system.”
For example, if housing prices crash during a future crisis, mortgage companies may simultaneously lose money and face cash shortages, which will make it difficult for them to pay investors what they need on behalf of troubled borrowers. These challenges will be compounded by the relatively high level of debt these companies have.
Regulators say this pressure on non-bank mortgage companies will hurt borrowers seeking mortgages and could force the federal government to assume these obligations.
Request for action
Yellen and her colleagues on Friday called on state regulators to strengthen requirements and standards for non-bank mortgage companies, including requiring them to develop a plan for how to safely end the crisis.
To address liquidity pressure during this tense period, regulators are calling on Congress to consider legislation to give Geely May new powers to expand the aid background program.
Additionally, regulators said Congress should consider establishing a fund funded by non-bank mortgage companies to “provide liquidity to non-bank mortgage service agencies that are on the verge of bankruptcy or collapse.”
In response, the industry organization Mortgage Bankers Association (Mortgage Bankers Association) said it supports the FSOC's goal of a “safe, stable, and sustainable financial services market,” but said some of the recommendations were “unnecessary.”
“Years of punitive capital regulation measures have limited depository institutions' willingness and ability to participate in the mortgage and service markets,” MBA President and CEO Bob Broeksmit said in a statement on Friday. “While we support national standards for capital and liquidity requirements, superimposing repetitive regulatory requirements or regulatory entities into a heavily regulated market will add significant cost and complexity.”
The American Bar Association warned that managing these changes could reduce competition and increase borrowing costs.
Scott Olsen, executive director of another industry organization, Community Home Lenders of America (Community Home Lenders of America), said that the FSOC report did not show that taxpayers faced significant risks, and the risk to the entire financial system was limited.
Olson said in a statement: “Given current housing affordability challenges, CHLA hopes regulators will not overreact to this limited risk and adopt regulatory and charging measures that limit mortgage access to credit.”
However, Boston College Law School (Boston College Law School) professor Patricia McCoy warned that non-bank mortgage companies rely on short-term loan financing, and “they can easily collapse” if borrowing rates soar or loans dry up.