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Are Banks or Mortgage Companies Originating More Loans This Year?

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Homeownership rates have steadily increased since the 2008 financial crisis and following recession waned. However, higher home prices and rising interest rates have caused these rates to stall over the past year. Even so, the overall housing market is considered much healthier than it was a decade ago, and the mortgage climate is different as well.

Where once consumers generally approached their banks or credit unions for mortgage loans, a growing number are now using nonbank mortgage companies. There are advantages to certain borrowers to this arrangement, and new regulations are keeping the risk from these players in check.

Growing Market Share

Non-bank lenders or independent mortgage banks (IMBs) are nothing new. Early IMBs helped fund this country's expansion west in the early 1900s, but their market share took a backseat to banks until recently.

According to data from the Home Mortgage Disclosure Act (HMDA), there were nearly 900 IMBs in 2017. During the worst part of the Great Recession in 2008, these companies accounted for 25 percent of loan originations. Last year, they accounted for 54 percent of new mortgages.

These large non-bank lenders like Rocket Mortgage, Quicken Loans, and Loan Depot, now account for six out of the ten largest mortgage lenders in the nation. More buyers are turning to these IMBs because they promise simpler qualification criteria even though the fees and rates are slightly higher than many banks.

New banking oversight rules and regulations are making it more costly for banks to underwrite mortgages, and many are tightening restrictions. Instead, some banks have decided to focus on other lines, such as commercial lending.

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What Is the Future of Non-Bank Lending?

As banks continue with a cautious approach to mortgage lending and fall behind with optimizing the customer experience, non-bank lending will continue to gain market share. These companies are not only willing to help middle-class and underserved markets, but they also cater to consumers that want a seamless online home buying experience.

It's a common misconception that IMBs are only originating high-risk mortgages that threaten to take the market back to the days of the last financial crisis. While these loans do focus on FHA and VA programs, there is little evidence that originating these loans for qualified buyers increases risk. Gone are the days where a person with no job and no assets can qualify for a mortgage loan.

There is also the misnomer that IMBs create a higher risk for taxpayers and the broader financial system. According to the Mortgage Bankers Association (MBA), banks may pose a higher risk since all deposits are federally insured. Conversely, an IMB that fails has generally already sold its loans to an entity like Ginnie Mae, so it is only risking losing its assets.

Even with Ginnie Mae, which now holds over $2 trillion in mortgages and gets 76 percent of them from non-banks, the MBA believes that it would take a systematic failure across financial markets to create a crisis. The fact is that IMBs are subject to the same regulations imposed by the CFPB as a bank. They are also regulated at the state and federal level and subject to scrutiny by Ginnie Mae, FHA, and warehouse lenders.

All mortgage lenders, regardless of whether it's a bank or IMB, are now required to take more steps to ensure that borrowers can afford their loans, such as verifying employment, income, and assets. They must also work with borrowers to avoid foreclosure and give them more chances to stay in their homes. This reduces mortgage default rates and the risk of a repeat of the last financial crisis.