Independent mortgage banks don’t need more government regulation

The Community Home Lenders Association (CHLA) recently released its latest IMB Report. That report documents with statistics and analysis the decade-long trend and current reality: that independent mortgage bankers now dominate the mortgage business.

The facts speak for themselves. Recently, 2020 HMDA data was released showing IMBs now originate more than 60% of all new mortgage loans. IMBs originate over 90% of VA loans for veterans, 90% of FHA loans, and over 70% of GSE loans. Over the last decade, the IMB share of Ginnie Mae issuance has skyrocketed from 12% to 87%.

The reason is simple. After the 2008 housing crisis, many banks exited the mortgage industry or imposed credit overlays to limit their loans to higher income borrowers and IMBs stepped in to pick up the slack. Unlike banks, which prioritize cross-selling other financial products and meeting internal rate of return targets, IMBs originate and service loans in both good markets and bad, because that is all they do.

Statistics also demonstrate that IMBs do a better job of lending to minorities, lower income, and other underserved borrowers. The Greenlining Institute recently found that in California, nonbank mortgage lenders are doing more lending than banks to women of color and to Black, Asian, and Latino low-income homebuyers. Urban Institute statistics continually find that nonbanks originate a higher percentage of loans to underserved borrowers, as measured by metrics like FICO scores, debt-to-income, and loan-to-value.

CHLA’s IMB report also explains in great detail who IMBs are, in order to address the troubling lack of understanding in Washington of this important market segment. In simple terms, IMBs are non-bank firms that underwrite, originate and close mortgage loans with their own funds, then predominately sell off these loans to aggregators or securitize them as Ginnie Mae, Fannie Mae, or Freddie Mac mortgage backed securities, sometimes retaining the servicing and sometimes not.

Contrary to the myth perpetrated by many in Washington, IMBs — and particularly small and mid-sized IMBs — do not pose any real taxpayer financial risk or systemic risk. Unlike banks, which enjoy FDIC-insured deposits, FLHB advances, and cheap access to Federal reserve funds, IMBs are not backstopped by taxpayers. IMBs have “skin in the game,” putting their own net worth at risk every day. In the 2008 housing crisis, it was the large market players — not small and mid-sized IMBs — that were bailed out by taxpayers. The next crisis will likely be no different.

The CHLA report also punctured other myths quietly encouraged by market competitors – notably the false claim that IMBs are not well regulated. The reality is that IMBs have much stronger federal consumer protections than banks do. Every mortgage loan originator that works at an IMB must (1) pass the SAFE Act test, (2) pass an independent background check, (3) complete 20 hours of SAFE Act pre-licensing courses, and (4) complete 8 hours of continuing education each year.

Remarkably, all mortgage loan originators that work at banks are exempted by Congress and the CFPB fromallof these consumer requirements. Most people would be stunned to learn that thousands of registered bank loan originators failed the SAFE Act test — and their customers don’t even know it!

The heart and soul of the IMB industry is the small and mid-sized IMBs that CHLA typically represents. These firms are the true small businesses of the mortgage industry. They are not impersonal, national bank or nonbank mega lender/servicers, but lenders with a community orientation and a strong commitment to providing their customers with personalized service.

As our nation made its way through the COVID-19 crisis, IMBs, and particularly smaller IMBs, played a critical role in helping distressed borrowers. According to the Urban Institute, IMBs made 80% of the refinance loans that helped homeowners take advantage of lower mortgage rates to strengthen their personal finances. This IMB refinance level was far above their market share of outstanding loans.

And, since IMBs predominately service federal agency loans, they led the way in offering distressed borrowers a forbearance option, a partial claim or loan modification to keep them in their home.

As the economy recovers from the COVID crisis, debate in Washington will inevitably return to issues like the proper role of FHA, the path forward on GSE reform and exiting conservatorship, and the proper role of the CFPB and mortgage regulations in protecting homebuyers and homeowners.

Statistics show that consumers benefit from the competition, choice and personalized service that IMBs (and particularly smaller IMBs) offer. Therefore, federal mortgage policies should promote equitable access for smaller mortgage lenders, reject redundant new regulations that undermine IMBs’ strong record in lending to minorities and other underserved borrowers and above all, reflect an understanding of who IMBs are and the key role they play in our housing and mortgage markets.