Non-Bank Lenders Selling Risky Mortgages

Could this Cause another Housing Crisis?

Non-Bank Lenders Selling Risky Mortgages
February 4, 2016

As the housing bubble continued to grow in 2005, non-bank lenders such as Countrywide Financial were responsible for 31% of all home loans. Since non-bank lenders appeal to homebuyers with lesser qualifications and shakier credit, a significant number of these loans were subprime loans — the type that eventually popped the housing bubble via defaults.

Once the bubble burst, many of the non-bank lenders were unable to survive, including Countrywide Financial. By 2009, only 10% of U.S. mortgages originated through non-bank lenders. Beginning in 2012, the percentage of non-bank originated mortgages began to rise by eight to ten percentage points annually. In 2014, 42% of mortgages originated through non-bank lenders.

The Los Angeles Times reported that former executives of Countrywide Financial currently operate three of the largest non-bank mortgage lenders — PennyMac Loan Services, Stearns Lending, and AmeriHome Mortgage Company. While their current mortgages are not necessarily subprime, these lenders target Federal Housing Administration (FHA) and Veterans Administration (VA) loans that cater to the riskier segment of homebuyers such as first-timers and those with poor credit.

This concerns officials at Ginnie Mae, the government agency that guarantees and securitizes FHA/VA loans for sale to investors as mortgage-backed bonds. As in the housing crisis, non-bank lenders still do not have the cash reserves to withstand the storm if the housing market were to collapse again. Banks are now required to have more cash on hand and adhere to tight new lending requirements via the Dodd-Frank legislation.

Arguably, this made housing too difficult to acquire and stalled its recovery. Both market and political forces are working to ease the standards somewhat and make housing more accessible and affordable, creating an opportunity for the non-bank lenders.

The Dodd-Frank Act applies to non-bank lenders as well, who are now also required to look over the borrower's ability to repay through analysis of income, debts, and assets. For banks to receive certain protection against defaults, the underwritten loans have to meet federal guidelines to be defined as a qualified mortgage (QM). Non-bank lenders that are willing to accept that risk are still able to issue loans that are beyond the edge of QM status.

Meanwhile, investors are still sticking to safer mortgage-backed bonds where the qualifying standards are maintained. Eventually there will be a greater market for riskier securities to increase yields as people forget the sting of the housing collapse. This ties in to the desires of many politicians, especially on the Democratic side, to open housing affordability up to more low-income and less qualified constituents.

At the moment, there does not seem to be much cause for concern. Non-bank lenders do show a larger overall default rate than banks, according to the LA Times. Two years’ worth of data dating from the end of September 2015 shows that 0.9% of bank-issued FHA loans were considered seriously delinquent while 1.1% of non-bank issued FHA loans were similarly classified. However, the variance within each group is significant.

For example, Wells Fargo has a delinquency rate of 0.5% as compared to the 2% rate of Great Plains National Bank in Elk City, Oklahoma. On the non-bank side, QuickenLoans has a delinquency rate of 0.4% compared to the 2.9% of Anaheim's Carrington Mortgage Services.

The non-bank lenders are critical to the success of the FHA and VA programs, as by definition both cater to less-qualified homebuyers. Currently, non-bank lenders have control of 64% of the FHA/VA loan market. For now, there is no housing bubble on the horizon, but it is best to stay tuned. The forces that caused the last bubble have not gone away.

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Steffanie | 02.04.16 @ 16:06
It looks to me like they didn't learn their lesson the first time around. Hopefully they wise up before we go through another crash.
Nancy | 02.04.16 @ 16:06
There's always something on the horizon to worry about, to lose sleep over. Hopefully, this works out for the best. I still haven't recovered from the last bubble bursting.
Erin | 02.04.16 @ 16:06
I'm glad to hear there doesn't seem to be any immediate danger, but it seems like it may only be a matter of time with the same people involved at different companies.
Chrisitna | 02.04.16 @ 16:07
I wish I knew why this seems to happen every time I am looking to buy a home... sigh. I would like to to take advantage of the lower interest rates before they disappear!
Carla | 02.04.16 @ 16:08
Bold move but I hope it doesn't end in disaster.
Alec | 02.04.16 @ 16:08
It's an absolutely terrifying thought that that could happen again. Hopefully it stays strong though. if the economy can recover better, this will be less of an issue as people get more money coming in
gracie | 02.04.16 @ 16:09
Wanting to own a home is a big dream for many people. It feels unfair that people are getting into the home of their dreams on risky loans in a time when economy is still very sluggish and unpredictable. It is only a dream if that family gets to pay off their home and create the life they have worked for. It's a nightmare if they are in a loan that does not get them to that goal and could ruin them ever reaching that goal again. No one likes to wait for the things they want but I would rather be disappointed in not getting a loan that would be hard to keep up with and wait than to get into a life that felt like my dreams come true only to have it taken away. The lenders need to be held accountable.
trish | 02.04.16 @ 16:12
Still see so many houses still going through foreclosure here. It is a reality for most still. But hopefully people learn from mistakes
Heather | 02.04.16 @ 16:13
Ugh! This is just so frustrating. We the American people bailed these people out the first time. If they crash again government better let them fail. Looksvlije they didn't learn their lesson.
Beverly | 02.04.16 @ 16:14
The mortgage industry is so messed up thanks to the Dodd/Frank endeavor. Will they ever learn!!
Brittany | 02.04.16 @ 16:15
This sounds really sketchy. I know forclosed homes tend to be the best at times to go for because of their prices, but this makes me cautious. Always something to worry about.
$commenter.renderDisplayableName() | 12.04.20 @ 13:34