Are nontraditional lenders mortgaging the future?
Nontraditional lenders are taking a larger share of the home mortgage market away from banks, according to a Harvard University study, but what does that mean for the national, state, and local housing markets — especially with reports that millennials are more interested in buying homes?
While some fear this trend could lead to a repeat of the housing collapse of 2008–09, industry executives note that today’s more stringent regulatory environment applies to banks and nonbanks alike. So while nonbanks now issue nearly half of all residential mortgages, federal regulators are keeping a watchful eye on them, too.
The Harvard study, titled “What’s Behind the Nonbank Mortgage Boom?” says nonbank lending institutions increased their market share of mortgage originations from 27% in mid-2012 to 48% in late 2014. In terms of dollar volume, nonbanks accounted for over 40% of total originations last year, compared to 12% in 2010.
Growing business activity among non-traditional mortgage lenders might be more of a national trend, but it’s being felt here to some extent. Michael Eisenga, president of Columbus-based American Lending Solutions, a mortgage-banking company, attributes that to a new regulatory environment that is making mortgage loans more of a niche product.
Putting together a home mortgage now requires more documentation — the package can be as thick as a small book or magazine, Eisenga says — and it’s no longer the commoditized cooking-cuter it was pre-recession. As a result, mortgages have become more tailored to individual consumers.
According to Eisenga, his company can focus solely on home lending, whereas banks are more diffuse and have to invest more in more training to bring loan officers up to speed on new regulatory hurdles and underwriting guidelines. “We have people from top to bottom who are really focused on finding ways to get the best product for the customer at the best interest rate, with the best terms, and sometimes that requires that we look a little bit outside the box,” he states. “We do it within certain guidelines, but we’re always trying to find ways to make that work. It’s becoming more of a specialization.”
That’s not to say banks will get out of the mortgage-lending business entirely, but Eisenga believes they have a decision to make as home lending becomes more specialized and the products become more customized. “I hear this from bankers,” he notes. “A lot of banks are making the decision that home lending is not where they really want to focus.”
Not every bank wants to avert its eyes from mortgage lending, however. Steve Hansen, vice president and senior residential sales manager for Associated Bank, doesn’t dispute the data from the Harvard study. However, based on his bank’s experience, nontraditional lending would appear to be more of a coastal trend (east and west) rather than an established pattern in the Midwest, where he says financial institutions are more likely to provide loan servicing after a mortgage-lending deal is closed.
“From our perspective at Associated Bank, and also from the standpoint of mortgage bankers in the state, we have not seen that significant an increase to the non-traditional lenders,” Hansen states. “To some extent, it is out there from some of the other sources like CPAs, insurance companies, and other corporations that are looking to get into home-mortgage originations.
“We actually have seen our business increase by 35% in the local market just through retail origination in Wisconsin and especially in the Madison–Dane County area. We see that [nontraditional] trend as a competitor, but we don’t see it as having a major impact on our business here.”
The Wisconsin Realtors Association’s June report on residential housing activity confirms a more robust housing market in 2015. Statewide, existing home sales in June rose 17.6% over June of 2014, which pushed the median price up by 6.3% to $169,000. In Dane County, sales were up 13% over June of 2014, with the median price increasing 4.2% to $233,500.
Perhaps the most encouraging trend is greater interest in home ownership among millennials. Their interest in home buying has been suppressed, in part, because of lifestyle reasons and, in part, because the 2008–09 financial crisis and housing collapse gave them second thoughts, especially if a family member or neighbor owned a home that was “under water.” In that situation, the home purchase loan has a higher balance than the home’s market value, which not only prevents the homeowner from being able to sell unless they are willing to cover a loss out-of-pocket, it also renders refinancing unrealistic.
“In the last couple of years, we’re starting to see millennials get into the market,” Hansen states. “Millennials will make up 50% of the buying market here in the next two to five years. We’re thinking ahead as far as how we market to them because they are a very viable group for the future of home purchasing.”
Cause for alarm?
However strong nontraditional mortgage lending happens to be, it raises questions about risk avoidance and preventing a repeat of the 2008–09 housing collapse. The Harvard study found that Federal Housing Administration (FHA)-insured loans are a key contributor to the recent surge in nonbank mortgage loans because the median FICO (credit) score of an FHA-insured, nonbank borrower is 667, compared to 682 for banks. At several nonbank loan originators, the median FICO score is below 660, and some believe this could bring higher rates of default and system-wide risk.
However, the U.S. mortgage market is largely shaped by federal policy, and regulators have begun to apply to nonbanks the same regulatory structure, via the 2010 Dodd-Frank Act and subsequent rule making, that also applies to banks.
Eisenga says people need not be alarmed about the heightened mortgage lending activity of nonbanks because they are much better supervised than they were before the financial crisis. Among the changes he would make in the new rules would be greater licensing flexibility to help people who once operated in the industry but can’t get their licenses renewed because they went broke, often through no fault of their own but as the result of the housing collapse. “Sometimes, bad things happen to good people,” Eisenga notes, “so more flexibility in licensing would be helpful.”
Hansen acknowledges that regulatory compliance is an ongoing process for banks, but he adds that Dodd-Frank brings improvements for consumers. He notes that under Dodd-Frank, matters like closing costs must be clearer to consumers, and changes that occur during the lending process must be promptly disclosed and well-documented. “One intent of Dodd-Frank is there will be no surprises for the consumer,” he says, “so they can make the best possible decision when they finance the purchase of a home.”
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