They currently originate around 70% of agency-supported residential home mortgages and about 90% of the riskier loans backed by the Government National Mortgage Association, or Ginnie Mae. Six of the top ten originators of home mortgages in 2018 were independent mortgage lenders, with Quicken Loans Inc. as number one.
Regulation
The nonbanks also have increased their share of mortgage servicing to close to 50% of loans supported by Ginnie Mae, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Unlike conventional banks, the independent mortgage companies are generally monoline operations, dependent on one business to make money. Of the dozen or so evaluated by Moody’s none have an investment grade rating on their debt.
They’re not regulated by the Fed or the Federal Deposit Insurance Corp. And they lack the deposit base and access to emergency Fed financing that commercial banks enjoy.
Credit Lines
In originating loans, the nonbanks depend on credit lines to fund the mortgage until it is sold.
They also rely on short-term financing to cover their obligations as loan servicers when borrowers fall behind on their payments.
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“Our greatest focus right now is on liquidity,” said Chuck Cross, a senior vice president at the Conference of State Bank Supervisors, one of the groups that presented at FSOC. “That short-term debt is tenuous and can disappear at the moment it is needed most.”
The credit lines are subject to cancellation or revision if the mortgage companies violate any of the contracts’ covenants, including being profitable in at least one of the two most recent quarters.
Covenants
Many were in breach of their covenants last year when a slump in mortgage refinancing helped push them into the red, said Warren Kornfeld, a senior vice president at Moody’s Investors Service.