In recent years, housing analysts have reported on the expansion in mortgage lending activity by nonbank financial institutions. Given recent activity, regulatory officials have expressed their interest in the lending activities at nonbank financial institutions. Nonbank consumer lenders can include pools such as hedge funds and they also include specialty finance companies such as auto finance companies. Another nonbank lending source is peer-to-peer lending.
Technically, for the purposes of mortgage lending, the largest nonbank lenders include credit unions and independent mortgage companies. However, generally, references to nonbank mortgage lending denote independent mortgage companies and not credit unions. Analysis by Federal Reserve Board researchers of data collected under the Home Mortgage Disclosure Act (HMDA) and matched with FDIC Call Reports finds that the majority of home purchase lending is done by independent mortgage companies such as Quicken Loans.
Figure 1 above shows the home purchase mortgage lending market shares of five lender categories, banks, both large and small, credit unions, affiliated mortgage companies, and independent mortgage companies*. As illustrated by the figure, mortgage lending by banks and independent mortgage companies fell over the 1995 to 2000 period. This decline was offset by an expansion in mortgage lending by affiliated mortgage companies. However, over the 2000 to 2010 period, the share of mortgage lending by banks and independent mortgage companies began to grow while the share of mortgage lending at affiliated mortgage companies collapsed. During this period, the share of home purchase mortgage lending at banks consistently exceeded the portion done by independent mortgage companies.
By 2010, banks accounted for half of all home purchase mortgage lending. However, in the years since 2010, the share of home purchase mortgages originated by banks began to decline while the proportion of home purchase lending at independent mortgage companies continued to expand. By 2014, the share of mortgage lending at independent mortgage companies eclipsed that of banks.
The shift in the market from bank to independent mortgage company lending partly reflects impact of the regulatory and judicial response to the unsustainable pace of mortgage lending in the years leading up to the Great Recession. The period of the Great Recession and associated housing bust was characterized by soaring default rates. Moreover, an inspection of mortgage practices stemming from rising defaults led to claims of unfair, deceptive, and improper lending practices. In addition to new laws, both federal and state, meant to curb future excess, litigation and several major settlements have taken place over the past few years and litigation of mortgage practices during the “boom” years continues.
In response to the increased regulatory and litigation risks, many banks have pulled back from mortgage lending, opening the door to other participants. While independent mortgage companies have always played a role in the mortgage market, the decline in the mortgage lending by traditional banks has raised the total share and the visibility of their lending volume.
* According to the Fed researchers, affiliated mortgage companies are non-depository mortgage companies owned by or affiliated with a banking organization or credit union
If independent mortgage companies have been establishing themselves sin the field of mortgage and reverse mortgage loans, then governments financed institutions should take immediate actions to regulate the market because many times the independent mortgage companies hire agents to get business opportunities due to which customers get trapped, and sometimes lose their entire investments.