Renewed Federal Scrutiny for Nonbank Mortgage Companies

Overview

• Recent report by the Financial Stability Oversight Council (FSOC) highlights the need for increased regulatory scrutiny of nonbank mortgage companies (NMCs).
• NMCs are critical to the residential mortgage origination and servicing industries.
• FSOC's recommendations could increase the regulatory burden for NMCs, despite no immediate changes.

NMCs' Role in the Mortgage Market

• In 2022, NMCs originated two-thirds of U.S. mortgages and held 54% of servicing rights.
• Historically, banks dominated this sector but retreated post-2007-09 financial crisis due to increased regulation and risk concerns.

Risks Identified

• FSOC outlines several risks due to reliance on NMCs:
  • Macroeconomic Vulnerability: Susceptible to economic shocks.
  • Liquidity Risks: Limited cash reserves for immediate needs.
  • Leverage and Operational Risk: Potential catastrophic impact if an NMC fails.
  • Regulatory Weaknesses: No federal prudential regulator, fragmented state oversight.

Recommendations

1. Promoting Safe and Sound Operations

• Increase capital and liquidity requirements.
• Enhance prudential requirements at state level.
• Empower FHFA and Ginnie Mae to establish standards and examine NMCs.
• Facilitate information sharing among regulators.

2. Addressing Liquidity Pressures

• Expand Ginnie Mae's Pass-Through Assistance Program (PTAP).
• Explore policy tools to alleviate servicing advance obligations.

3. Ensuring Continuity of Servicing Operations

• Establish a sector-financed fund for NMC liquidity during financial distress.

Implications and Critiques

• Recommendations could push NMCs to consider becoming banks, similar to post-financial crisis shifts.
• CFPB Director Rohit Chopra emphasized the need for FSOC to evaluate its own tools for addressing identified risks.
• The potential negative impact on NMCs and taxpayers is not fully acknowledged.
• Criticism from "The Wall Street Journal" highlights moral hazard concerns and taxpayer implications.

Future Outlook

• While immediate effects are limited, increased regulatory oversight is anticipated.
• The industry will closely monitor the impact on business operations.