The landscape of the single-family mortgage origination and
servicing business has transformed significantly since the housing crisis.
Commercial banks are no longer the dominant players in the marketplace, with
many exiting the space, which has allowed independent mortgage banks (IMBs) to
take center stage.
A recent report by the Urban Institute’s Housing Policy
Center describes the transition, which has seen IMBs facilitate two
record-breaking origination years in 2020 and 2021, despite challenges presented
by the COVID-19 pandemic. This shift has seen more than 60 percent of
conventional loans and more than 90 percent of government loans being
originated by IMBs.
However, IMBs face a major challenge – funding instability
and associated costs.
“Commercial banks have filled the hole created by the demise
of the savings and loan industry in the late 1980s,” the report states. “For
more than 50 years before that, savings and loan associations and mutual
savings banks originated more than 70 percent of single-family mortgages for
their own portfolios. In the 1980s, savings and loan associations and mutual
savings banks experienced the same fate as Silicon Valley Bank and First
Republic.”
At the time, the Federal Reserve raised interest rates
quickly to calm inflation. Savings and loan associations were able to hold
30-year fixed rate mortgages in their portfolios funded by short-term deposits,
which created a negative interest carry situation and led to their bankruptcy,
the report continues. Commercial banks, with their diversified lines of
business and access to government-guaranteed deposits, were able to step in at a
critical time and offer the guarantee provided by the Federal Deposit Insurance
Corp. (FDIC).
Consequently, the shift towards single-family mortgage
lending by commercial banks was largely driven by the desire for fee income,
which ultimately led to their domination of the sector. However, the 2008
housing crisis revealed shortcomings in their approach, the report explains. With
a lack of investment in technology and staff, large commercial banks could not
handle the eventual surge in delinquencies, resulting in criticism and
lawsuits.
These challenges prompted commercial banks to rethink their
involvement in single-family mortgage servicing, realizing the servicing of single-family
mortgages required more than processing payments for a fee, according to the
report. It also entailed reputational risks and operational complexities, which
caused commercial banks to drastically reduce their presence in servicing
single-family loans.
The repeal of the Glass-Steagall Act in the 1990s further
encouraged commercial banks to move away from single-family servicing, as they
elected to explore more profitable, fee-based businesses. This shift, along
with regulatory complexities and reputational risks, has created an environment
where IMBs have re-emerged as the experts in originating and servicing
single-family mortgages.
“IMBs have become the new monoline experts in originating
and servicing single-family mortgages. Before the banks moved into
single-family origination and servicing, the monoline expertise had been
concentrated in the savings and loan industry,” the report states. “Because of
the complex regulations and the reputational risk in originating and servicing
single-family mortgages for commercial banks, it appears the shift back to
monoline businesses dominating single-family mortgage finance is going to be
the norm for the foreseeable future.”
Ginnie Mae, a federal agency that guarantees mortgage-backed
securities, plays a pivotal role in supporting IMBs, as it can leverage its
charter, which permits the agency to guarantee borrowing activity by
private-sector firms, provided such activity is backed by assets insured or
guaranteed by federal agencies. This authority can be used to establish stable,
low-cost funding sources for IMBs.
To address the liquidity needs of IMBs, the report outlines
two proposals:
Ginnie Mae Guarantees Commercial Paper: IMBs could
issue commercial paper guaranteed by Ginnie Mae to fund their closed loans to
reduce the cost of originating government loans and provide stability in
funding during market stress.
Ginnie Mae Backs IMB Liquidity for Delinquent Loans:
Ginnie Mae could guarantee funding for IMBs when their loans become delinquent
to mitigate the risk of issuers failing to meet required mortgage-backed
security payments, as seen in cases similar to the fraud case against Taylor
Bean, in which the company pledged the same loan multiple times to obtain the funds
needed for its required mortgage-backed security payments, and the bankruptcy
of RMF, one of the main originators and servicers of reverse mortgages.
By utilizing Ginnie Mae's existing authority and creating the
proposed solutions, the report contends the mortgage market can benefit from
more stable and cost-effective funding sources, supporting IMBs in their critical
role in the single-family mortgage sector.