Warning from U.S. Officials: Mortgage Companies Could Worsen the Next Recession

The United States is facing concerns about the potential impact of the next economic downturn on the mortgage industry. With plummeting home prices, stagnant financial markets, and escalating delinquencies, officials fear that these factors could lead to a chain of failures in the sector. The U.

S. Financial Stability Oversight Council (FSOC) has raised alarms about non-bank mortgage companies, highlighting their vulnerability to market fluctuations and lack of regulatory oversight. Established after the 2008 financial crisis, FSOC has been monitoring the risks posed by non-bank mortgage firms, which have become significant players in the housing market.

Unlike traditional banks, these companies are highly exposed to market changes, rely on unstable funding sources, and operate under lighter regulation. The council has warned that the vulnerabilities of non-bank mortgage companies could escalate in a future crisis, potentially leading to multiple company failures and government intervention to protect borrowers. Treasury Secretary Janet Yellen, who leads FSOC, emphasized the need to address the risks posed by non-bank mortgage companies to prevent disruptions in the financial system.

Regulators are calling on states and Congress to take action to mitigate these risks, including establishing an industry-funded safety net to support mortgage firms during times of crisis. Despite their complex nature, non-bank mortgage companies have become integral to the U.S.

housing market. Companies like Rocket Mortgage, PennyMac, and Mr. Cooper handle a significant portion of home mortgages nationwide.

Recent data from FSOC shows that these firms originated around two-thirds of U.S. mortgages and hold servicing rights for over half of mortgage balances.

Non-bank mortgage servicers currently manage servicing rights for nearly $6.3 trillion in unpaid balances on agency-backed mortgages, representing a substantial portion of outstanding balances in the market. However, the reliance of these companies on short-term financing and high levels of debt could exacerbate the impact of a mortgage market shock on the broader financial system.

In light of these risks, Yellen and her colleagues are urging state regulators to strengthen oversight of non-bank mortgage companies and develop plans for their orderly resolution in times of crisis. They also recommend exploring legislative measures to enhance liquidity assistance programs and establish a fund financed by industry players to support struggling servicers. While FSOC's recommendations aim to safeguard financial stability, industry groups have expressed concerns about potential negative consequences.

The Mortgage Bankers Association supports the goal of a secure financial market but warns about excessive regulatory measures that could reduce competition and increase borrowing costs. The ABA cautions against restrictions that may hinder mortgage access, while the Community Home Lenders of America emphasizes the need to minimize taxpayer risk. Some regulators, like Brandon Milhorn from the Conference of State Bank Supervisors, are calling for more research on the proposed liquidity fund before implementation to understand its potential impact.

Professor Patricia McCoy highlights the importance of addressing the risks faced by non-bank mortgage firms to prevent future failures and protect the stability of the housing market. In conclusion, the concerns raised by FSOC about the vulnerabilities of non-bank mortgage companies underscore the need for proactive measures to mitigate risks and safeguard the financial system from potential disruptions in the event of an economic downturn. Collaboration between regulators, industry stakeholders, and policymakers will be essential to address these challenges and ensure the stability of the mortgage industry moving forward.