Are we at the beginning of the next real estate induced recession? Ginnie Mae thinks we possibly are. Ginnie Mae is a fully owned government corporation controlled by HUD. Ginnie Mae is currently seeking permission to increase staffing for better oversight of the burgeoning nonbank mortgage market.
What may surprise many is that even as the real estate market heats up, traditional bank lenders such as Wells Fargo and Bank of America are still retreating from the mortgage market. Picking up the slack in a major way are nonbank lenders such as Quicken Loans, LoanDepot, and Guild Mortgage. The big surprise is that these and similar lenders are expected to write 60% of the federally insured mortgages this year.
These nonbank entities are watched by government agencies but not as closely watched as traditional bank lenders. The fact is that part of the reason the big banks have pulled back from the mortgage market is the result of huge fines imposed by the government for writing mortgages that misstated borrowers’ incomes or property values. Bank of America has agreed to pay $800 million in damages for FHA backed loans that it has made and Wells Fargo is currently subjected to a Justice Department lawsuit. Wells Fargo made 74% fewer FHA backed loans in 2014 compared to the previous year. Bank of America reduced FHA related volume by 69%. Chase bank agreed to pay $614 million and reduced FHA loan volume by 74%.
The big nonbanks in the mortgage market, Quicken Loans, LoanDepot LLC and Guild Mortgage, have all increased their market share considerably over the past year. Making sure these lenders remain liquid is the concern that Ginnie Mae is sounding the alarm about.
These lenders raise money through bondholders and need to repay the money plus interest. The money needs to be repaid regardless if the homeowners are staying current or not with their mortgage payments. Although foreclosures are down significantly compared to the Great Recession, even in strong economies there are people that struggle to make their mortgage payments. This is where the liquidity problem comes in. Ginnie Mae thinks that because of less government oversight these companies are not maintaining enough liquid cash to assure they can repay bondholders when cash flow alone is not enough to make the payments. There is also a question if these companies are making some of the same uncertain loans that banks are now regulated to avoid.
Homebuyers certainly appreciate these nontraditional mortgage funds. However, again Corporate America has found a way to side step the new consumer protects laws that congress enacted as a result of the Great Recession. What this new risk brings could be years in the making but we might be seeing the beginning today.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.