Most Americans have never heard of PennyMac, United Wholesale Mortgage, loanDepot, and Freedom Mortgage.
These are just a few of the huge “non-bank” mortgage lenders that funded almost 60% of all mortgages last year.
The only “non-bank” player that most Americans have heard of is Quicken Loans, and that is because of its massive amount of advertising and because it is now the largest mortgage lender in the world.
The non-bank vs. bank distinction matters because non-banks don’t sit on large amounts of cash, and many are currently reeling in the face of the current financial crisis.
- “Non-Banks” or Mortgage Banks. These are entities that have only one function – originating, underwriting and funding mortgage loans. They hold no deposits and operate no other businesses – other than “servicing” (discussed below). They fund their loans using huge lines of credit called warehouse lines. They make money by selling the mortgages they fund on the secondary market – either by securitizing them or by selling them to other investors. If they can’t sell loans, they make no money.
- Banks and Credit Unions. These consist of large commercial banks we have all heard of like Wells Fargo, Bank of America, Chase, and Citi, as well as many credit unions that most people have not heard of such as USAA, PenFed or numerous regional players. Banks hold deposits and tend to be much better capitalized in general. Banks originate, underwrite and fund mortgages just like non-banks, but they also perform a myriad of other banking functions such as business lending, checking and deposit holding. They can also usually afford to hold onto loans in their portfolios if and when loans are unsalable (something non-banks can almost never do).
- Brokers. Mortgage brokers only originate loans. They do not underwrite or fund mortgage loans. They instead send loan files to other entities (mostly non-banks) that underwrite and fund the loans on behalf of brokers. Brokers dominated the business prior to the 2008 meltdown, funding over 75% of all loans. That % plummeted after 2008 but climbed back up to about 16% of all mortgage loans funded in 2019. Brokers have the advantage of being able to “shop” their loans among multiple entities for the best possible loan. Since the COVID-crisis, however, broker options have been greatly curtailed.JVM Lending is now in the “non-bank/mortgage bank” channel, but we were in the broker channel through 2014. We only left it because we had too many appraisal issues (because we could not use our own appraisers) and because we could never guarantee sufficient speed or turn-times.
- Servicers. Servicers collect mortgage payments (for a small fee) from borrowers and distribute proceeds among investors and other entities (counties, insurance companies, etc.) entitled to such proceeds. Both banks and non-banks have separate servicing arms or businesses. Many banks and non-banks, however, do NOT service their loans but instead sell the “rights” to this servicing on the secondary market. This is often confusing to borrowers because their servicer is a different company than their note-holder (or the entity that holds their mortgage).
WHAT IS THE PROBLEM?
The problem is that servicers are on the hook for distributing proceeds to investors whether the borrowers make a payment or not.
And over 8% of all borrowers are now in forbearance – a staggering number.
And very few servicers have the cash to cover these payments – putting enormous stress on the industry.
The government is trying to come up with solutions but their solutions are often inadequate and the entire industry remains precarious.
The other problem is that the “servicing rights” are now worth far less than what they were previously worth (because of forbearance risks), and this is keeping rates higher than they might otherwise be.
Mortgage banks (like JVM’s) that do not have servicing arms are now often in much stronger positions than mortgage banks with servicing arms because of the risk of forbearance.
This is ironic because the situation was often the opposite prior to the COVID-19 crisis, as servicing arms was considered to be another good source of dependable cash flow.
Founder/Broker | JVM Lending
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