With the current exponential rise in nonbank servicers, the CFPB and FHFA are weighing both the consequences and positive reinforcements the new trend could have on the mortgage industry and consumers.
Since the financial crisis, the nations’ biggest banks are rapidly losing income from their mortgage divisions; many causes are to blame, the main being settlements from fraudulent pre crisis lending practices, shrinking mortgage originations, the tight credit box, as well as others. Nonbanks and smaller lenders are picking up their missed lending opportunities. According to the Federal Housing Finance Agency’s Office of the Inspector General, the amount of loans that Fannie Mae and Freddie Mac have purchased from nonbank and smaller lenders has increased exponentially in the past few years.
The share of nonbanks servicing mortgages has grown 300 percent between 2011 and 2013. According to the FHFA, more than 46% of the loans purchased by Fannie Mae and Freddie Mac in the first three quarters of 2013 were from nonbank mortgage lenders.
Mortgage TrueView did an analysis on the 2013 HMDA data showing that there is still a gap in approval rates between large lenders and smaller lenders. Smaller lenders and nonbanks have approval rates on non-conventional loans of as low as 11 percent, where the typical rate is between 60-80 percent of large lenders. However, with the FHFA collaborating with GSEs to clarify buyback loans, and encouraging private insurers to guarantee loans for veterans, nonbanks are only given more opportunities to grow and take more business from larger lenders. However, there is a higher risk to GSEs buying from nonbanks due to a counterparty that may default on financial obligations (representation and warranty obligations).
An analysis of the 2013 HMDA data shows that lenders are missing opportunities; There is a gap in the approval rates between lenders. Some lenders have approval rates on non-conventional loans of as low as 11 perfect, where the typical rate is between 60-80 percent from larger lenders.
Mortgage TrueView believes the huge discrepancy between approval rates of large lenders and small lenders is based off three determining factors: bias in the approval process, borrowers aren’t qualified, but mainly – loan denials are due to the lenders’ process itself – and how they execute it.
Lenders with higher loan approval rates – and higher revenues – tend to have very strong technology, or strong non-conventional lending programs (or both). The more streamlined the process – the more loans (IE more revenue) a lender is able to produce. Currently, 17% of the 30 largest mortgage servicers aren’t banks, and that number is only suspected to increase.
Nonbank services currently wield $1.4 trillion in mortgage servicing rights out of a nearly $10 trillion market, and the Financial industry watchdogs are considering stricter regulations for nonbankers, as they have claimed non bank home loan servicing companies are often unwilling to work with troubled borrowers to modify mortgages and prevent foreclosures. Nonbanks use short-term financing to buy servicing rights for troubled mortgage loans that will likely not pay off until difficulties resolve in the long-term. Often, nonbank infrastructures may not be able to handle the responsibility of servicing large volumes of mortgage loans, and are more susceptible to economic downturns that could increase nonperforming loans that require servicer loss mitigation.
Since nonbank special services don’t require the same capital levels as a large bank lenders, this allows them to both undertake more nonconventional loans, and abandon troubled borrowers more easily. The reason for standards for banks was deposit insurance, and the sense that IDIs could impose risks on taxpayers, this is not applicable to nonbanks, but a recent report from Fitch Ratings suggests the rise of nonbank servicers threatens private-label residential mortgage-backed securitizations (nonbanks now service 74% of all private-label securities by loan count).
The question remains whether authorities will tighten regulations on nonbank servicers, and who will support their advocacy on stricter guidelines. Elizabeth Warren (helped establish the CFPB), is currently the biggest advocate for a thorough analysis of nonbanking practices and regulations. Currently, CFPB supporters are fearing a new drop in the market due to the rise in nonbank servicers, and the FHFA is planning an inspection soon.