Tech-savvy millennials have fled to the suburbs during the coronavirus pandemic, fueling a hot housing market that has allowed non-bank and fintech mortgage companies to grab a significant chunk of the growing market share, by granting loans at a faster rate than more traditional bank lenders.
This booming market has so far protected one vulnerability. Homeowners had several options to support their finances, ranging from refinancing opportunities to additional UI and stimulus checks. As these programs come to an end this year, most homeowners who took advantage of coronavirus-era policies to delay their loans are now out of forbearance, avoiding a 2008-style widespread foreclosure crisis that many feared at the start of the pandemic.
But for some borrowers – largely blacks, Hispanics and first-time buyers – ending housing programs could pose significant challenges.
Can non-banks handle the volume?
The problem is with non-bank providers who have never dealt with the number of loan modification requests and foreclosures that policymakers expect and who are not required, like banks, to hold capital in reserve to compensate for losses. costs. These services, which handle the day-to-day management of a mortgage, including foreclosures, have taken market share aggressively since the Great Recession and subsequent bank mortgage regulation.
Mortgage agents and other industry watchers were on high alert for these issues at the start of the pandemic, even unsuccessfully pressing the Federal Reserve for a liquidity facility for non-bank mortgage agents.
And although a widespread liquidity crisis reminiscent of the 2008 crisis now seems unlikely, experts worry about the logistical challenges associated with everything from high-impact transactions such as loan modifications or foreclosures to a lack of infrastructure for manage loans in the event of foreclosure.
“Some of these officers are unprepared and have not been financially prepared for the wave of loan modification requests that will be inevitable when the foreclosure moratorium ends,” said Chris Odinet, professor of law at the University of Iowa. wrote on fintech and non-bank mortgage services.
Recently, the Consumer Financial Protection Bureau issued a rule intended to ease stress on the system and protect some homeowners from foreclosure and cause them to modify their loans, but service officers complained that such rules could increase. compliance costs.
In issuing the rule, the CFPB said that a “potentially historically high number of borrowers will seek help from their service agents at around the same time this fall, which could lead to delays and errors as agents service staff work to process a high volume of loss mitigation requests and job applications.
Ginnie Mae’s vulnerabilities
The risk is especially high for Ginnie Mae’s securities services, where non-banks dominate – around 75% at the end of June, according to mortgage analysis firm Recursion. Ginnie Mae guarantees securities backed by loans insured by the Federal Housing Administration, the Veterans Home Loan Program of the Department of Veterans Affairs, the Rural Development Housing Programs of the United States Department of Agriculture, and a public housing program and Indian Housing and Urban Development Office.
Ginnie Mae declined to comment for this story.
These borrowers are more likely to default and be foreclosed than loans guaranteed by Fannie Mae and Freddie Mac, as they are more likely to be vulnerable groups, such as minorities and first-time buyers.
Additionally, it may be more expensive to manage the securities guaranteed by Ginnie Mae, as he acts only as a guarantor instead of buying loans from originators and issuing securities like Fannie and Freddie. This means that agents take on a higher risk in the event the borrower defaults.
And not only do non-banks have a high share of Ginnie Mae-backed securities, they also face more turmoil when, ultimately, the end of COVID-era forbearance policies begin to lead to foreclosures and foreclosures. modifications.
According to data from Recursion, loans managed by non-banks are nearly double the forbearance rate of those managed by banks in Ginnie Mae-backed securities. Both numbers are relatively low from what they were at the height of the pandemic, but the higher non-bank number shows these businesses could be more exposed to a housing slowdown.
For borrowers, especially first-time home buyers or others who are in FHA, VA or other programs supported by Ginnie Mae, this could have dire consequences, such as the “very real fear” that an agent modifies a borrower’s loan without evaluating whether it is the best option due to lack of training or experience, Odinet said.
Areas of concern and confidence ahead
The cost of servicing a delinquent loan is also higher than it was in 2008 due to CFPB regulations, said Richard Koss, director of research at Recursion and former economist at Fannie Mae, saying pressure on this powerful new generation of services.
“During the financial crisis, there were all these horror stories about people in the agents who just weren’t answering their phone calls, and people lost their homes because they didn’t know what theirs were. options, ”Koss said. “Interviewing is a money-making machine in a boring market, but if things go wrong and people stop paying, it’s not so fun anymore.”
With house prices rising nationwide, “most mortgage borrowers have good home equity, so even if they can’t make payments, their risk of foreclosure is expected to be quite low.” said Andreas Fuster, professor of finance at Swiss Finance. Institute @ EPFL who wrote about fintech mortgages during the pandemic. This dynamic means that if the worst were to happen, homeowners could sell “at a price high enough to cover their mortgage.”
Michael Fratantoni, chief economist at the Mortgage Bankers Association, noted that many more people came out of forbearance than expected by the end of the pandemic, and he expects the adjustment to be fairly smooth.
“Beware of a headline that says number of foreclosures has increased; remember we are basically starting from scratch throughout the pandemic, ”he said. “Some maintenance costs will increase, but hopefully it will be for a relatively short period of time.”
Certainly, the concerns that arose at the start of the pandemic could resurface the next time there is an economic shock. Refinancing and buying a home has helped borrowers a lot, and without low interest rates, strong government support for consumers, and a pandemic in which people have specifically sought more space for their families, it’s easy to see how it could have turned out otherwise.
In one report Released earlier this month, the Federal Reserve Bank of Cleveland advanced “a shock with a less positive outcome: a situation in which revenue service is interrupted and there is no simultaneous drop in interest rates and no increase in refinancing activity “.