Nonbanks Overtake Banks as Top Mortgage Issuers
For the first time in over 30 years banks are no longer the primary issuers of mortgage loans. Out of the top 50 mortgage lenders during the third quarter of this year, 51.4% of mortgage dollars originated from nonbanks, up from 46% for all of 2015 and from 19% in 2012 and 9% in 2009, according to data from Inside Mortgage Finance as reported by the Wall Street Journal.
Mortgage Lending Leaders
While nonbanks are quickly gaining an edge in mortgage lending, some big U.S. are still in the ranks of the top ten mortgage lenders by volume. J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), which were responsible for about 50% of all mortgage lending in 2011, were among the 2016 Q3 leaders. However, year to date, these three banks make up just 21% of all mortgage lending.
Over half of the top 10 mortgage lenders were nonbanks. Amongst these nonbanks, the top three were Quicken Loans Inc., PennyMac Financial Services Inc. (PFSI), and Freedom Mortgage Corp., according to the Wall Street Journal. (To read more, see: When Are Mortgage Lenders Better Than Banks?)
This shift in mortgage lending from banks to nonbanks is largely a result of banks’ increasing aversion to risk. One of the big changes has been banks’ reluctance to issue mortgages insured by the Federal Housing Administration (FHA), which is likely a reaction to a number of recent lawsuits brought forth by the federal government concerning these specific loans.
With FHA mortgages making up a significant portion of the mortgage market, nonbank lenders have gladly filled in the gap left by banks, willing to issue mortgages to less creditworthy borrowers with the assurance that these loans are guaranteed by the government. As chief economist at Quicken Loans, Bob Walters, said, “We are not taking on credit risk—the loss is borne by [government] agencies."
Mr. Walters may be correct to assert that at the level of the individual nonbank lender, there is not much to worry about. However, the worry is that as these nonbank lenders become a much larger part of the market they pose a systemic risk to the greater financial system similar to the kind that brought about the subprime meltdown only a decade ago. (To read more, see: 5 Consequences of the Mortgage Crisis.)
As nonbank lenders do not take in deposits, much of their financing comes from banks. Thus, although banks avoid the risk of carrying more risky mortgages on their balance sheets, they are still connected to nonbank lenders and their more risky lending practices. If large-scale defaults were to occur, the losses could spread throughout the entire financial system.