FSOC Report on Nonbank Mortgage Servicing

Overview

• FSOC report published in May 2024 highlights the role of nonbank mortgage companies (NMCs) in the mortgage market.
• NMCs account for two-thirds of all mortgage originations and own servicing rights on 54% of mortgage balances.
• NMCs serve groups historically underserved by the mortgage market.

FSOC's Role

• Identifies risks to U.S. financial stability.
• Promotes market discipline and responds to threats to the financial system.
• Concerns about vulnerabilities of NMCs collectively, despite no single NMC being systemically important.

Report Highlights

• NMCs' vulnerabilities are more pronounced in the Ginnie Mae market.
• Recommendations lacking in areas of providing liquidity support and need for a single federal regulator.

Background

• NMCs focus mostly on mortgage products; shocks can lead to income, balance sheet, and credit access deterioration.
• NMCs are often unprofitable during low origination periods (high interest rates).
• Mortgage Servicing Rights (MSRs) can be sold or retained by originators.
• NMCs are heavily reliant on warehouse lines of credit and MSR credit lines, which can be risky.

Vulnerabilities of NMCs

• NMCs may face distress due to similar business models and shared financing sources.
• High delinquency rates can exacerbate financial difficulties.
• Distress in the NMC sector could lead to widespread issues, impacting borrowers and home prices.
• Government's tools to mitigate risks are limited compared to banks.

Ginnie Mae Vulnerabilities

• Ginnie Mae issuers face additional liquidity needs due to different legal structures compared to GSEs.
• High delinquency rates require NMCs to advance payments, straining resources.
• Borrowers in the Ginnie Mae market are typically low-income with higher delinquency rates.

Potential Solutions

Liquidity Backstop Improvements

• FSOC recommends Congress allow Ginnie Mae to expand PTAP, including more comprehensive expense coverage.
• Suggests establishment of a fund financed by nonbank sector to provide liquidity.
• Alternative suggestions include FHLB membership and Ginnie Mae commercial paper facility for liquidity access.

Regulation

• Advocates for a single federal prudential regulator to oversee NMCs.
• Suggests FHFA as a potential regulator, with Ginnie Mae having authority over specific standards.

Conclusions

• NMCs play vital roles but pose systemic vulnerabilities.
• Additional solutions and regulatory improvements could enhance stability.
• FHFA suggested as a central regulatory body with Ginnie Mae handling specific requirements.

Authors

• Laurie Goodman: Founder of Housing Finance Policy Center at Urban Institute.
• Ted Tozer: Nonresident fellow at Urban Institute, former president of Ginnie Mae.

References

• FSOC 2024 report
• Goodman, Neal, and Pang (2023) on mortgage rates.
• Kaul and Goodman (2020) on FHLB membership for NMCs.
• Tozer (2023) on Ginnie Mae support.