What's Behind the Non-Bank Mortgage Boom?

Abstract

Mortgages constitute a large, complex, and controversial market in the United States, shaped largely by federal policy-making. Since 2010, the role of non-banks – a term commonly used to define firms un-associated with a depository institution – in the overall mortgage market has grown handedly. In 2014, non-banks accounted for over 40 percent of total origination in terms of dollar volume versus 12 percent in 2010. Of the 40 largest servicers, 16 were non-banks, accounting for 20.5 percent of the total market and 28 percent of outstanding top-40 servicing balances, versus just 8 percent in 2010. We find that both regulatory factors and market factors are helping drive the non-bank boom, and identify key distinctions between pre-crisis non-banks and non-banks now. Today’s non-banks are:

1) subject to much more regulation and supervision;

2) more active in mortgage servicing than ever before; and

3) using technology to transform the mortgage market.

Without non-banks, today’s sluggish mortgage market would be much less vibrant, and our analysis reveals positive impacts of non-banks on customers. However, non-banks’ growing involvement in riskier non-prime FHA-insured origination is concerning. And while reducing the counter-party risk non-banks pose to Fannie Mae and Freddie Mac is a worthwhile policy goal, implementing bank-like standards for non-banks is not the best strategy to substantially mitigate risks in the housing system, and could stunt innovation. Instead, reforming the GSEs and FHA insurance is critical to reducing both counter-party and borrower default risk. Policymakers should act to do so, embrace non-banks, and address unintended regulatory impacts driving depository institutions out of the market.

Keywords: Mortgage, Non-Banks, FHFA, FHA, Fintech, Fannie Mae, Freddie Mac

JEL Classification: G21, G23, G28, G32