Bank Aggregator Exit, Nonbank Entry, and Credit Supply in the Mortgage Industry

Authors

• David Benson
• You Suk Kim
• Karen Pence

Date

• September 1, 2023

Abstract

• Banks are retracting from mortgage aggregation, not just origination and servicing.
• Aggregators provide significant liquidity by linking local loan originators to global capital markets.
• Banks began exiting the aggregation market in the 2010s, especially for FHA-guaranteed mortgages.
• Bank exits led to market share gains for nonbank aggregators and some lenders bypassing aggregators.
• The disintermediation benefited low credit score borrowers by expanding the credit box.
• Exiting banks continued to provide short-term funding to nonbank loan originators and aggregators.

Introduction

• Nonbanks now dominate mortgage intermediation, originating 62% and servicing 54% of mortgages in 2022.
• Literature mostly covers bank withdrawal from origination and servicing, not aggregation.
• Aggregators buy, pool, and securitize loans, connecting originators to capital markets.
• Study focuses on bank exits from the FHA mortgage aggregation and impacts on credit supply and performance.

Key Points

Bank Exits from FHA Market

• BOA and Chase were major FHA mortgage aggregators.
• Exits were due to high costs and legal risks from defaulted mortgages and FCA lawsuits.
• BOA's issuer share in Ginnie Mae pools was about 40% in 2010, and Chase's was over 10% in 2012.

Market Share Changes

• Nonbanks replaced approximately 50-60% of BOA and Chase's market share.
• There was a significant rise in nonbank issuers in the Ginnie Mae market.
• Some originators began securitizing their loans directly due to aggregator exits.

Impact on Credit Supply

• Credit scores on FHA originations decreased, indicating increased lending to lower-score borrowers.
• Nonbanks’ singular focus on mortgages led to riskier loan profiles.

Ex-Post Loan Performance

• No increase in delinquency rates recorded even with expanded credit supply.
• BOA's exit reduced foreclosure rates, indicating better handling of risk by nonbanks.

Methodology

• Used Difference-in-Differences (DID) estimation around the exit shock.
• Analysed market share shifts across counties with varying pre-exit market shares.

Data Sources

• Home Mortgage Disclosure Act (HMDA)
• FHA administrative data
• Nationwide Multistate Licensing System & Registry (NMLS)

Conclusions

• Bank exits significantly reshaped the mortgage market, boosting nonbank roles.
• The disintermediation aided low credit score borrowers by utilizing soft information.
• Nonbanks, benefiting from short-term funding by banks, increased mortgage market liquidity.
• Study contributes to understanding the role of aggregators and the shifts in credit supply dynamics.