BY GINA CHON

The increasing role of non-banks in the U.S. mortgage market sparks memories of the 2008 financial crisis. As the likes of Citigroup, Bank of America and JPMorgan have cut home lending and servicing, specialists have stepped in, but they lack bank-like capital cushions. Government-owned Ginnie Mae, guarantor of $2 trillion in mortgage-backed securities, is particularly exposed, as are the mainly lower-income Americans it is supposed to help.

Ginnie Mae outsourced oversight to regulators like the Federal Reserve when banks were its main securities issuers and servicers. But a post-crisis crackdown caused them to shrink those businesses. In 2017, four of the top five issuers of Ginnie Mae-backed single-family MBS instruments were non-banks, with PennyMac Loan Services and Lakeview Loan Servicing in the two top spots.

Meanwhile, Ginnie Mae’s guarantee book has ballooned to almost five times its size in 2007, putting it in the same ballpark as government-sponsored Freddie Mac. But Ginnie Mae has only about 140 direct employees, compared to more than 6,100 workers at Freddie Mac.

That’s partly because Freddie Mac buys and owns mortgages as well as guaranteeing them, but the huge disparity in resources means Ginnie Mae, which supports mortgages for veterans, lower-income individuals and minority groups, can’t adequately police the non-banks whose borrowers’ performance it essentially guarantees. A September audit supported that finding.

Non-bank lenders and mortgage servicers often rely on the kind of short-term funding that proved so vulnerable during the crisis. Furthermore, non-banks are largely regulated by state watchdogs, which have varying standards.

U.S. Housing Secretary Ben Carson, who oversees Ginnie Mae, is positioned to sound the alarm but he is one of the less visible members of President Donald Trump’s cabinet and has little experience in mortgage finance. Lawmakers have not managed to comprehensively reform Fannie Mae and Freddie Mac, but at least they are currently on a tight leash. Ginnie Mae is essentially untouched, and its size and non-bank ecosystem rarely come up as concerns.

Michael Bright, Trump’s nominee to lead Ginnie Mae, told lawmakers at his confirmation hearing on Tuesday that rising interest rates made financial stress among non-bank mortgage lenders and servicers his biggest worry. He offers a rare and lonely warning that swaths of the home-loan market escaped post-2008 reform.

First published July 25, 2018

(Image: REUTERS/Mike Blake)