The rise of alternative payment services, such as PayPal, Google Wallet, Venmo, and Apple Pay, offer convenience for customers and more competition for banks, and credit unions, but they also pose a greater risk to consumers. The recent security problems with Apple Pay fraud, for example. have been well publicized. And this highlights one of the root problems with alternately financial services – they lack government backing. There is no government oversight or FDIC regulations to monitor these services for financial stability or even fraud.
The latest concern is over mortgage lenders. A news report in American Banker this week explains the dilemma facing Ginnie Mae – they don’t have the resources to police non-banking mortgage lenders.
FHA Loans at Risk
Large banks have ceded the market for riskier borrowers to non-banks, especially for mortgages. However, the borrowers may have more to lose than the non-bank lenders. Any one of a number of events could put theses companies into financial hole that could make it hard to stay in operation, let alone pay off their backers. Ginnie Mae doesn’t have the resources to monitor the financial health of these firms. Ginnie Mae is asking for a bigger budget to expand their mandate – it currently has a staff of 145 and a budget of $23 million – but the majority of loans backed by the Federal Housing Administration (FHA) are now being made by companies without any supervision.
According to the latest estimates, more than 62 percent of FHA-backed home loans are held by non-banks. The number of FHA loans held by large banks has dropped to 30 percent.
Although none of these companies have defaulted to date, the risk is still there. Some of these firms have been raising cash as a cushion for the time when rates rise, which will happen. They also need to be prepared to defend against potential lawsuits in the future. Since mortgage lending is cash-intensive, there is more risk; when a loan defaults the lender still has to pay bondholders.
Riskier Mortgages Lucrative for Non-Banks
These maverick lenders are doing a booming business, One of the latest entrants in the U.S. mortgage market is SoFi The company started by refinancing student loans and now has a $100 million portfolio, offering mortgages up to 5 million in 17 states. SoFi is competing effectively by offering an all online loan application process, and authorizing mortgages with as little as 10 percent down payment.
SoFi is getting most of its funding from Goldman Sachs, Barclays, Credit Suisse, and Deutsche Bank in to from of warehouse lines of credit, and it secured peer-to-peer loans in 2014. Sources at Goldman Sachs estimate that non-banks could steal as much as $11 billion in profits from banks, including $2.3 billion in mortgage servicing and fees.
Could these non-banks trigger another mortgage crisis if market conditions shift? No one has the tea leaves to read that future, but the fact that these unregulated organizations are commanding more of the FHA-backed mortgage market should be cause for concern. Not only could the failure of these companies affect the housing market, their success in selling mortgages to higher risk buyers could mean more poaching of mortgages from banks and credit unions. These companies offer great term rates with low down payments that are attractive to any potential home buyer.
This is just another market segment where non-banks are attacking bank profits. Today, they are lending to those buyers who wouldn’t qualify for a loan but tomorrow is another day. Maybe today’s mortgage banks should be start thinking about tomorrow.
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