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FSOC: Regulators, Congress Should Enhance Resilience of Nonbank Mortgage Companies

Federal Housing Finance Agency, FHFA

The Financial Stability Oversight Committee (FSOC) is encouraging state and federal regulators and Congress to do more to enhance the resilience of nonbank mortgage companies (NMCs).

The agency did so in a report released Friday (May 10) that also identifies risks in this sector, the FSOC said in a press release outlining the report.

“We need further action to promote safe and sound operations, address liquidity risks, and enable continuity of servicing operations when a servicer fails,” Secretary of the Treasury Janet L. Yellen said in the release. “Moving the Council’s recommendations forward is crucial to protecting borrowers and preventing disruptions to economic activity.”

NMCs originate two-thirds of mortgages in the United States and own the servicing rights on 54% of mortgage balances, as of 2022, according to the release. Those figures are up from 39% and 4%, respectively, in 2008.

Among the strengths of NMCs are that they serve groups that have been historically underserved by the mortgage market, they originate mortgages more quickly than their competitors, and they have expanded into specialty default servicing, the release said.

However, they also have vulnerabilities. These include exposure to mortgage-related assets, significant liquidity risk and vulnerabilities shared with other NMCs that could lead to stress across the entire sector, per the release.

“NMCs bring certain strengths to the market,” the FSOC said in the release. “However, NMCs also have vulnerabilities, and in a stress scenario, NMCs’ vulnerabilities could cause NMCs to amplify and transmit the effect of a shock to the mortgage market and broader financial system.”

These risks have not been adequately addressed by state and federal regulators, according to the release.

In its report, the FSOC recommends that state regulators enhance prudential requirements and that Congress provide the Federal Housing Finance Agency (FHFA) and Ginnie Mae with additional authorities to better manage these risks, the release said.

It also recommends measures to address liquidity pressures in the event of stress and to ensure continuity of servicing operations, per the release.

The FSOC added in the release that it “will continue to monitor the evolution of the risks identified in the report and may take or recommend additional actions to mitigate such risks.”

It was reported in February that the Bank of England is calling for more research into non-bank lenders. In that case, the effort aims to prevent a “credit crunch” that could result from a pull-back by hedge funds, pension funds, asset managers and insurers.