Illustration: Lindsey Bailey/Axios
The 2008 financial crisis was caused, in part, by mortgage lenders taking on too much risk. Now the pendulum has swung so far in the opposite direction that the private sector has all but stopped taking mortgage risk.
Why is this important: Private sector risk aversion has kept millions of Americans from buying homes. It also drives banks out of the mortgage game. That might be OK, if the non-banks weren’t disappear too, and he’s unlikely to return any time soon.
Rollback: The banks have paid more over $100 billion in mortgage-related fines after the financial crisis – a stark reminder that such activity can be extremely costly.
- This, alongside stricter government rules on the amount of capital banks must allocate to such activity, has resulted in what one banker described to Axios as “derisking” in mortgage lending – a/k/ a year outing in progress.
How it works: Most mortgage lenders make money in two ways.
- Once they take out the loan, they keep it on their books for a relatively short time before selling it to the government—either directly (the Federal Housing Administration and the Department of Veterans Affairs both buy mortgages) or agencies like Fannie Mae and Freddie Mac.
- After selling the loan, the originator usually continues to service it – to collect mortgage payments and send them to the new owner of the loan. Service charges are low, usually about a quarter of a percent, and repairers must make payments even if the owner is in arrears.
Banks back down
Bank capital and liquidity rules put in place after the 2008 financial crisis make both activities unattractive to banks trying to maximize their return on capital, especially once compliance costs are added.
- “The Basel capital rules are so punitive that banks really can’t afford to be in the service sector,” Urban Institute fellow Ted Tozer told Axios.
- Add to that an unknown chance of fines and/or shaming from regulators and politicians, and the banks overall concluded that this was not a business they wanted to be in.
Where is it : Non-banks now originate 71% of agency-backed loans and 86% of government-backed loans, according to Inside Mortgage Finance.
- Although these numbers are the result of a long-term trend dating back more than a decade, they are likely growing faster than ever right now. “Over the past month, I think it’s started to pick up speed,” BTIG analyst Eric Hagen told Axios, as deposits fled banks.
- Banks still eclipse non-banks in the relatively small market for non-government-backed jumbo loans, as these products help build relationships with high-value customers and can be held as long-term assets in the market. bank balance sheet.
The big picture: The mortgage market is now dominated by non-banks that operate with relatively thin capital cushions and need significant economies of scale.
- Between March 2021 and January 2023, total mortgages fell by 83%, per Black Knight. Refinances – which made up more than 70% of the total at the start of the period – fell 95% as soaring interest rates killed demand.
- Refinances are the relatively cheap and easy way for non-banks to make money in the mortgage industry. Without them, more of those lenders are likely to close.
- Since most current mortgages are at 3% or less, refinances aren’t going to pick up anytime soon. The result is that few or no new non-bank lenders are likely to enter the market, even as the number of existing lenders continues to decline.
Why It’s So Hard To Qualify For A Mortgage
Since loan servicers have to make mortgage payments even when homeowners don’t, they have a strong incentive to avoid this situation.
- The result is that even though government agencies like Fannie Mae and Freddie Mac are willing to buy riskier mortgages, lenders are unwilling to issue them, and potential buyers with less than stellar credit find it extremely difficult to buy a home.
“It’s getting harder and harder to keep banks in the mortgage business, which ends up hurting ordinary Americans,” JPMorgan CEO Jamie Dimon wrote in this year’s issue. letter to shareholders.
- The Urban Institute estimates that if mortgage credit returned to normal levels – lower than the excesses of the mid-2000s but much looser than today – a million additional loans could be taken out a year.
The problem is not so much that lenders are unwilling to assume credit risk. As the higher default rates on government-backed loans demonstrate, lenders will – if they get paid more for servicing those loans. (FHA and VA loans typically pay around 0.45% to repairers, compared to 0.25% paid by Fannie and Freddie.)
The real problem is not credit, it is liquidity. Lenders need to be liquid enough to handle a large number of mortgage payments while waiting for some sort of resolution like a foreclosure or a workout.
- Many repairers, for example, would have run out of cash very quickly in the first weeks of the pandemic without the government’s formal mortgage forbearance programs.
The bottom line: As long as the government continues to guarantee mortgages, they will not go away. But homebuyers looking for loans won’t have much choice.