First, let's extend a big "well done" to the folks at the Mortgage Bankers Association and other housing trades for pushing back
Unfortunately, even as members of the Housing Industrial Complex give federal bank regulators a practical lesson in politics, the Biden Administration is preparing to designate a number of large independent mortgage banks, as well as other nonbank firms and funds, as "systemically significant financial institutions" or SIFIs under the Dodd-Frank law.
The Biden Administration endgame is easy to see, if you look. The Federal Housing Finance Agency just completed three reviews of nonbank sellers/servicers, according to a report published last week, that reiterated nonbank servicers/sellers pose "elevated risks" to Fannie Mae and Freddie Mac. In fact, the GSEs under the current administration pose a threat to IMBs and to the housing sector more broadly
"The FHFA's reviews, conducted through its Division of Enterprise Regulation, included an on-site inspection and focused on loans that the nonbanks sold to or serviced for Fannie and Freddie," reports Scott Carpenter of Bloomberg News.
The FHFA report was endorsed by Director Sandra Thompson and includes the usual disparaging innuendo against IMBs. Some of the risks posed to the GSEs include "a lack of regulatory oversight." In fact, IMBs are subject to extensive state and federal regulation and disclosure.
Another false complaint by the FHFA and the Financial Stability Oversight Council is liquidity. Nonbanks "lack access to the same funding sources as banks, such as the Federal Reserve's lending facilities or consumer deposits, instead relying on shorter-term funding sources such as warehouse lines of credit and repurchase agreements that are more vulnerable to being reduced or canceled."
In fact, IMBs with large servicing books are islands of liquidity that generate vast amounts of cash to fund their operations. The warehouse lines that so concern the FHFA and FSOC are actually legally contracted and self-funded with escrow balances placed by IMBs with banks such as market leader JPMorgan. Where comes the risk? From the FHFA and the Biden Administration.
The fanciful scenario wherein a bank cancels a fully secured warehouse line for an IMB and loses access to escrow deposits, is absurd, yet this is the sort of thinking that passes for serious work within the confines of the FHFA and the Biden White House. Moreover, the scenario cited by the FHFA and endorsed by Director Thompson has never happened.
In every failure of an IMB going back to Taylor, Bean & Whitaker in 2009, the banks have not only maintained warehouse lines but have been prepared to offer debtor-in-possession financing to the buyer of the bankrupt IMB. Why? Because the credit lines to IMBs for warehouse or default advances are fully secured with eligible mortgages. The folks at the FHFA do not seem to understand this nuance.
The FHFA is also concerned that IMBs are increasing their share of originations and loans serviced. In fact, IMBs now account for three-quarters of all residential mortgage originations and this total is only likely to rise in the future. Why? Because federal prudential regulators are strongly encouraging banks to exit residential mortgage servicing. Banks don't really like selling loans to the GSEs either.
Banks such as Wells Fargo are exiting the residential market and New York Community Bank, the last bank servicer in the Ginnie Mae market, may be forced to exit the mortgage market. Indeed, many commercial banks have stopped selling loans to the GSEs because of the strange progressive agenda pursued by the Biden White House. The Federal Home Loan Banks don't play progressive games.
The FHFA report makes two significant recommendations to the FHFA, both of which were accepted by Director Thompson and reveal her true endgame. The FHFA will conduct reviews of nonbank seller/servicers, to include but not limited to, procedures, internal controls, and documentation requirements. FHFA will also "actively guide the risk monitoring and analysis process within IMBs, to include but not limited to, procedures and internal controls." Does the FHFA have the legal authority to perform this role?
The FHFA report and the two recommendations apparently are precursors to FHFA Director Thompson making a recommendation to the FSOC to designate half a dozen or so large IMBs as SIFIs. FHFA and FSOC seem to be trying to document pretext for a SIFI designation for largest IMBs to avoid another
The FHFA process seems clear. FHFA personnel will do a systems and controls review and FSOC will mandate a) stress testing and b) resolution planning for IMBs. Both of these proposals are totally ridiculous and will not reduce systemic risk, but will cost consumers in terms of higher mortgage costs. Are the large nonbank conventional issuers at risk ready to push back? Maybe.
The rebuttal process for SIFI designation contained in the Dodd-Frank legislation takes a while. And we may have a Republican in the White House by next January. The large IMBs – including Mr. Cooper, Freedom, PennyMac, Rithm Capital, Lakeview and Rocket Mortgage – could take a page from MetLife and hand the FHFA and FSOC another defeat in court. But will they fight?
"I suspect the large nonbank conventional issuers won't push back because big companies can pay the high regulatory costs and know that it will deter or reduce competition from smaller players," notes Michael McAuley, principal of Garrett McAuley & Co. "Fewer bigger players is always the consequence of excessive regulation. I'm not so sure regulators consider it to be unintended."
In the fantastic progressive world of Washington, fewer bigger IMBs regulated as SIFIs may seem like a good choice. In the world of real collateral and volatile markets, however, a lack of diversity and growing concentration spells increased systemic risk. Fewer larger IMBs means more risk for the taxpayer in the event of a default and higher housing costs for consumers already weary from inflation.
