Nonbank mortgage lenders are furious about a report from the Federal Housing Finance Agency’s Office of Inspector General that claimed they are less regulated than large banks and pose increased risks to Fannie Mae and Freddie Mac, National Mortgage News reported July 22.
The report in question, released July 17
, delved into the recent rise — and risks — in direct sales of home loans to Fannie and Freddie by independent mortgage lenders.
The report stated that smaller lenders are less well capitalized than banks, and since independent mortgage lenders rely on warehouse lines of credit, their business can abruptly stop during a period of financial stress, National Mortgage News reported.
Independent lenders are concerned that the FHFA, which oversees the government-sponsored enterprises, will use the report as a reason to raise minimum net worth requirements for smaller lenders that do business with the GSEs.
“We are jumping through hoops every day to comply with regulations,” Mike McHugh, president and CEO of Continental Home Loans, told National Mortgage News. “The inspector general made it out like we have no regulations and made no mention of state regulators or the Consumer Financial Protection Bureau. I'm angry because they clearly didn't do their homework.”
Kristine Belisle, a spokeswoman for the FHFA's Office of Inspector General, said the criticism from independent lenders failed to acknowledge the breadth of information in the report.
“We stand by what we have reported,” Belisle told National Mortgage News. She said that the report noted in two different footnotes that independent mortgage lenders are regulated by states and the CFPB.
“Part of our job as IG is to identify risks facing the GSEs, assess FHFA's oversight of identified risks, when necessary provide suggestions for mitigating those risks, and finally, report on our findings to Congress and the American taxpayers,” Belisle told National Mortgage News. “We reported on potential risks, which FHFA had already identified.”
The inspector general's report examined the rise in sales to the GSEs by independent mortgage companies at the same time that large banks retreated because of massive repurchase requests for subpar loans. It describes how the mortgage market has shifted as large banks stopped purchasing mortgages originated by nonbank lenders because of forced buybacks on bad loans.
Without the large bank aggregators to perform an additional layer of review, the GSEs now have to track hundreds of smaller lenders' financial conditions and compliance with guidelines.
The report noted that some smaller lenders and nonbank mortgage companies have limited financial capacity, and in some instances, are subject to less comprehensive federal oversight than larger financial institutions. As a result, some may pose a heightened risk of financial loss to the GSEs.
Glen Corso, executive director of the trade group Community Mortgage Lenders of America, told National Mortgage News that the report ignored the fact that the concentration of risk from a handful of large lenders did not work out well before 2008.
Corso claimed the report failed to accurately describe the regulation of nonbank mortgage companies.
Nonbank lenders are regulated by states and their loan officers go through a rigorous licensing process and must register with the Nationwide Mortgage Licensing System. On the other hand, bank loan officers employed by federally regulated depositories do not have to get state licenses.
The disparity has created a skewed mortgage licensing system where an individual can be denied a state license to originate loans for a nonbank lender but then get hired by a bank in the same state and originate loans without a license.
Rob Zimmer, a lobbyist for the Community Mortgage Lenders of America, said the FHFA and the inspector general should first determine whether direct sellers to the GSEs have higher loss rates.
“Before the inspector general makes these assertions, they need to dig into the data and find out if there would be higher losses in the event of a downturn,” Zimmer told National Mortgage News. “There has to be some way to analytically evaluate the risk.”
Fannie and Freddie have put limits on the amount of loans they will buy from independent mortgage lenders.
Callie Dosberg, a Fannie Mae spokeswoman, told National Mortgage News that the GSE limited the volume of loans that can be sold to Fannie based on the financial strength of each lender, including net worth, asset quality and liquidity.
For years mortgage banks enjoyed low entry barriers since they could sell loans to the GSEs with a net worth of just $250,000. In 2010, the GSEs raised minimum net worth requirements to $2.5 million. The FHFA has in the past considered raising net worth requirements to $5 million, which McHugh said could force some lenders to shut down.
Since the downturn, the GSEs adopted major quality control initiatives, including multiple reviews of loans they purchase and securitize. Credit scores on loans sold to the GSEs now average 720 or higher. Independent lenders claim the current batch of home loans delivered to Fannie and Freddie are among the highest quality in years.