Unique Risks and Vulnerabilities Posed by Nonbank Mortgage Companies: Implications for Financial Stability

Nonbank mortgage companies, which now make up over two-thirds of the mortgage origination market, pose unique risks and vulnerabilities that can negatively impact financial stability, according to a report published by the Financial Stability Oversight Council (FSOC). These firms, which include Quicken Loans and Rocket Companies, differ from traditional banks in their specialized business models, making them susceptible to fluctuations in housing prices, interest rates, and delinquency rates. They also have higher levels of leverage, shorter-term funding, and operational risks compared to traditional lenders. During a meeting of the FSOC, chaired by Treasury Secretary Janet Yellen, the report’s findings were discussed, and recommendations were made to address these issues. These include establishing a fund financed by the industry to provide liquidity to failing nonbank mortgage servicers, giving more authority to the Federal Housing Finance Agency and Ginnie Mae to manage counterparty risk, and requiring state regulators to implement resolution planning for large nonbank mortgage firms. The report suggests that nonbanks pose “very similar risks” to banks, yet they are not subject to the same regulatory requirements. This lack of oversight has been criticized by Consumer Financial Protection Bureau head Rohit Chopra, who highlighted the fact that these firms do not maintain adequate cash reserves or face as much scrutiny as traditional lenders. Although no individual nonbank mortgage company holds more than 7.4% of the residential mortgage origination market, the FSOC acknowledged that the vulnerabilities of these firms could still create significant issues in times of financial distress. The report does not explicitly address the question of whether any nonbank mortgage lender should be designated as a Systemically Important Financial Institution (SIFI), but this possibility is not being ruled out by some observers.