House Pall

A warning about the mortgage industry

As millions of laid-off Americans struggle to make housing payments during the pandemic, Prof. Nancy Wallace issues a dire forecast: the mortgage industry itself could collapse.

For more than two years, Wallace and Prof. Richard Stanton have been raising the alarm that fragile “nonbank” lenders have grown to dominate the market, originating two-thirds of all single-family home loans—up from 20% in 2007—but are subject to little oversight. They have scant capital of their own or access to emergency cash, and they also target more vulnerable borrowers who are more likely to miss payments early on, their research has found.

It is another disaster waiting to happen, they warn. During the pandemic, homeowners have been given a temporary payment reprieve by the federal rescue package, which meant plummeting cash flows for nonbanks.

In the short run, vulnerable nonbank lenders have been saved from bankruptcy by rock-bottom interest rates that spurred a wave of refinancing and new loan originations. They also got government backup from Ginnie Mae, Fannie Mae, and Freddie Mac.

“Defaults are on the rise,” Wallace says. “A lot depends on what happens with unemployment and how long this drags on, but my position remains that nonbank lenders are in a very precarious position.”

Wallace argues that any government assistance should have come with a quid pro quo: future fees and increased oversight. “Nonbank lenders can’t keep pushing the envelope then expect to be rescued. They don’t want to follow any of the rules that banks follow, and then they want to be treated like banks when liquidity shocks occur.”