April 6, 2015
Non-banks have been gaining an increasingly large share of the market for FHA-backed mortgage lending, according to a recent study conducted by the American Enterprise Institute's International Center on Housing Risk. These financial institutions, which are outside the reach of bank regulations and capital requirements, have been increasing issuance of these home loans as major banks retreat from this market.
AEI figures indicate non-banks accounted for 62.2 percent of FHA-backed mortgages in February, up from 26.8 percent in November 2012, when the center began monitoring such data, according to American Banker. During this period, large banks' share of this market plunged to 29.6 percent from 65.4 percent.
Some have lauded the willingness of non-bank mortgage lenders to provide loans at a time when major banks are retreating from such activity, American Banker reported. These large financial institutions have been selling fewer loans to Fannie Mae and Freddie Mac after encountering several challenges stemming from this particular type of loan origination. Major banks paid substantial fines to settle claims of improper underwriting, and in addition, some have encountered significant repurchase requests.
Late last year, officials of Fannie Mae, Ginnie Mae and Freddie Mac all commended new non-bank participants for helping potential homeowners obtain mortgages when major banks were reluctant to grant FHA-backed loans, according to American Banker.
However, many market observers have taken a different tack, voicing their concerns about this broad market shift, according to American Banker. Non-banks generally have less capital than major banks. Therefore, they lack the financial resources needed to pay back the government should borrowers default and spur repurchase requests that flow back to the more thinly capitalized non-banks.
These defaults could rise sharply if economic conditions worsen and the job market deteriorates, American Banker reported. Borrowers with low and moderate incomes - who have made only the minimum down payment required by the FHA - would face greater chances of losing their equity and their homes, and experts have added that such a situation could create financial difficulties for the FHA. Edward Pinto, co-director and chief risk officer for the Center on Housing Risk, shed some light on the situation.
"The non-banks are not deep pockets and many will not survive in a downturn," he told American Banker. "The FHA and taxpayers are going to be on the hook if the non-banks do not make it through the next cycle, because that's what history has shown."