Liquidity Crises in the Mortgage Market

Abstract

Nonbanks originated about half of all mortgages in 2016, and 75 percent of the mortgages insured by the FHA and the VA. Both shares are much higher than those observed at any point in the 2000s. In this paper, we describe how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in the aggregate appears to have minimal resources to bring to bear in an adverse scenario. We show how the same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The high share of nonbank lenders in FHA and VA lending suggests that the government has significant exposure to the vulnerabilities of nonbank lenders, but this issue has received very little attention in the housing reform debate. M ost narratives of the housing and mortgage market crash in the late 2000s attribute it to house price declines, weak underwriting, and other factors that caused credit losses in the mortgage system. The Financial

The Role of Government and Private Institutions in Credit Cycles in the U.S. Mortgage Market

“…FHA-insured and VAinsured loans together account for almost all of the loans backed by "the full faith and credit guarantee of the US Government." 6 Kim et al (2018) provide an in-depth look at the current origination of FHA and VA mortgages, including the institutional details of this market and the role of non-bank mortgage companies. The paper focuses on the implications of the limited amount of capital of those companies on the stability of the financial sector and the potential need for a government bailout in an adverse event.…”

Helping homeowners during the Covid-19 pandemic: Lessons from the Great Recession

“…4 A sufficiently large wave of mortgage payment problems, particularly if accompanied by a drop in home prices, could still impair the financial system and cause losses for taxpayers. New risks had also emerged in parts of the mortgage finance system-most notably, those related to the rise of thinly capitalized nonbank financial institutions as mortgage originators and servicers (Kim et al, 2018).…”

“…Covering the missed payments falls on the servicing industry in the short to medium run, which requires servicers to have ample liquid funds. Yet the rise of nonbank mortgage servicers noted earlier means that the majority of mortgages are now serviced by nonbanks with relatively thin capital cushions (Kim et al, 2018). Policy actions have been taken to shore up servicer liquidity, given the high take-up of forbearance plans to date.…”

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“…The underlying theory that we test begins with variation in how lenders fund mortgage originations. Unlike banks, nonbanks lack access to stable deposit funding, and so they fund originations through short-term, warehouse debt that is collateralized by the originated mortgage and repaid once the mortgage has been securitized (e.g., Kim et al 2018). An increase in mortgage-backed security (MBS) prices raises nonbanks' revenue per mortgage originated, and it lowers their funding costs by improving the value of their collateral.…”

“…Indeed, we find that ZIP codes more exposed to the LCR-induced increase in nonbank lending see higher mortgage default rates. Second, a larger nonbank lending sector increases average funding fragility because nonbanks' short-term funding model makes them more prone to run-like withdrawals (e.g., Kim et al 2018). 2 Yet, despite these negative implications for financial stability, the spillovers from LCR regulation have an ambiguous effect on overall welfare.…”