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bronxiteforever

(9,287 posts) Sun Feb 25, 2018, 10:35 AM Feb 2018

The Mortgage Market Is Moving Into the Shadows

Regulators should pay closer attention to the boom in non-bank lending.
By Richard Koss
Bloomberg
February 23, 2018

The last financial crisis occurred in part because unregulated lending in the mortgage market got out of hand. Believe it or not, it’s starting to happen again, and could ultimately precipitate another disaster unless regulators get their act together. Make no mistake, regulators have done plenty to rein in the mortgage business since the 2000s...

So who has the advantage? Well, much of the regulation doesn’t apply to non-bank lenders, which typically originate mortgages and quickly sell them onward to be packaged into securities for investors. These “shadow banks” don’t take deposits, don’t have much capital, and are usually overseen by state banking authorities, which tend to be less stringent. They are also considerably more aggressive than their bank counterparts...The shift has been even more extreme in mortgage servicing. Non-banks now service about 51 percent of all loans packaged into new Freddie Mac securities, according to mortgage analytics firm Recursion Co. That’s more than double the share of just five years ago.

What accounts for the non-banks’ appetite? They might argue that their processes and technologies give them greater confidence in their underwriting. But one can’t ignore the reality that, thanks to relative lax regulation, they also have less at stake. By operating with less capital, they can reap very large returns in good times. In bad times, however, they might not have the capacity to withstand losses or deal with the servicing burden created by widespread delinquencies. As a result, a large swathe of the country’s lending and servicing system could implode when the next crisis hits. The only solution is to level the regulatory playing field between the banks and the non-banks. This means raising capital requirements for the latter, and subjecting them to stress tests.

https://www.bloomberg.com/view/articles/2018-02-23/mortgage-loans-the-market-is-moving-into-the-shadows

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The Mortgage Market Is Moving Into the Shadows (Original Post) bronxiteforever Feb 2018 OP

There are two conversations taking place about this. Igel Feb 2018 #1

Igel

(35,309 posts)

1. There are two conversations taking place about this.

Reply to bronxiteforever (Original post)

Sun Feb 25, 2018, 01:10 PM

Feb 2018

They're not held in the same room, same building, or even same part of town. And that's a problem.

The first correctly says that the regulations aren't strong enough. Not every mortgage-lender is covered by the most stringent regulations, all of which either require higher capital reserves on the part of the lender or higher credit ratings on the part of the lendee. In fact, people have even pushed to weaken some of the regulations so that mortgages can be issued to those with lower credit ratings or more "innovative" mortgages can be issued.

No, some of the push to weaken the regs have been to make it easier to make money if your a lender. The people knee-deep in the first argument talk about these folk.

The second conversation looks at the impact of the new regs from 8 or 9 years ago and asks, "Who's affected by these regulations?" This largely drives the "pushed to weaken" statement in my previous paragraph--we more often hear about large companies' statements, but the push is far larger than just that. For this question, though, there are two answers (of course). Those smaller and/or less well-heeled providers of mortgages have a harder time meeting the capital reserve requirements. So this helps business. And the less well-heeled folk who want to get mortgages have a harder time meeting the credit rating and income requirements.

While most poor people in the US are probably still white, and those who would loan to them are mostly still white-owned, anything that disproportionately affects those in the bottom half of the income distribution curve disproportionately affects people of color. On its face, the regulatory scheme put into place in 2009 for mortgages had a disproportionate impact on people of color, both small mortgage-providers as well as those seeking to buy a house. It's prevented them from acquiring real property that still forms the basis of most wealth for most people in this country. Of course, those with the best FICO scores and incomes are still disproportionately above that 50% point on the household income distribution curve.

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