Three years ago, mortgage rates hovered around 3%, driven by an uncertain economy in the wake of the COVID-19 pandemic and an aggressive Federal Reserve policy of purchasing large swaths of mortgages. With significant refinance loan opportunities, these were the halcyon years for independent mortgage banks (IMBs), which were profitable and growing.
Then the bottom fell out. Inflation exploded and the Federal Reserve made an abrupt U-turn — raising interest rates and ending its purchase of mortgage loans. Mortgage rates soared from 3% to more than 7% just in a little less than a year. Mortgage rates have stayed high since then, reaching 7.79% just one year ago and staying in a range from 6% to 7.5%.
This dramatic increase in rates had dire consequences for IMBs. The mortgage refinance market collapsed. Qualifying new homebuyers was more challenging, with mortgage rates skyrocketing, but housing prices remaining elevated.
With staffing levels geared to mortgage volumes and revenues that were no longer sustainable, IMBs had to slash expenses and staff. Some well-run and long-standing IMBs were forced to sell to larger companies or merge with another business to achieve better economies of scale. Many simply closed their doors.
Most others continued to adapt — matching expenses with revenues, streamlining operations and toughing it out. Many have been through multiple business cycles and do what is needed to stay viable. But this downturn is not over.
Glimmer of hope
The good news is that the survivors, having re-positioned themselves for tough times, will be ready to benefit from a potential upturn in the market for mortgage originations. Put simply, where the mortgage industry very recently saw only challenges on the horizon, opportunities are beginning to be seen, as well.
“Put simply, where the mortgage industry very recently saw only challenges on the horizon, opportunities are beginning to be seen, as well.”
There is a glimmer of hope with falling mortgage rates — and the potential re-emergence of refinance opportunities. September likely will witness the first Fed rate cut in many years — with the promise of more to come. Still, challenges remain.
There’s been a rush to expand regulations on IMBs. Some states are extending Community Reinvestment Act regulations to IMBs. The Consumer Financial Protection Bureau has adopted reporting requirements that duplicate Nationwide Multistate Licensing System (NMLS) reporting requirements. New requirements have cropped up regarding appraisals and default prevention servicing. These new compliance demands take place at a time when IMBs have trimmed staff in light of falling revenues.
So IMBs need a voice in Washington to advocate for their interests. This is one of the reasons why associations that lobby for business interests are so important.
Exaggerated claims
In recent years, IMBs have witnessed a steady drumbeat of claims that their financial institutions were the next great risk to our financial system. Of course, IMBs hold firmly that such claims are unfounded. The industry is still coming through one of the worst financial periods in history for IMBs, yet there is no evidence of taxpayer or systemic calamities that IMB opponents predicted.
When the claims of “IMB risk” were made, it was Community Home Lenders of America (CHLA) that publicly pushed back, explaining in their annual IMB report and repeatedly in the press why these claims were wildly exaggerated. When the Financial Stability Oversight Council (FSOC) issued a report sounding alarms about non-bank mortgage servicing, it was once again CHLA that publicly panned the report for ignoring the reality that the overwhelming majority of IMB servicers pose no taxpayer or systemic risk.
IMBs join associations such as CHLA for another reason. The big IMBs — like the big banks — have the economies of scale to support direct lobbying efforts on their behalf in Washington and to hire a phalanx of outside lawyers and consultants to track what is going on. Small and mid-sized IMBs do not. So CHLA makes advocacy efforts on behalf of small and mid-sized IMBs one of its top priorities.
Like-minded community
CHLA was one of the first national groups to highlight how Fannie Mae and Freddie Mac repurchase demands were suddenly imposing 30% and higher losses on IMBs due to skyrocketing interest rates. CHLA pressed for a more reasonable indemnification resolution, similar to what is offered by Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA), and both Fannie and Freddie have since moved in that direction.
Another important area for advocacy is Ginnie Mae, a critical agency for smaller IMB issuers that securitize FHA, VA and Rural Housing Service loans. CHLA led the effort to increase salary and expense funding for Ginnie Mae, so it can more promptly approve crucial acknowledgment agreements and maintain its broad base of issuers.
Finally, CHLA led the charge by raising concerns when FICO hiked credit score prices by 500% in the space of just one year. And when the CFPB raised concerns about the lack of competition and rising prices in other areas, including title insurance and employee verification services, CHLA was surprised to find itself as the only national industry group expressing such concerns. Individual IMBs set the policies and are able to interact directly with top federal mortgage policy members. Other like-minded community IMBs should together to make the voice of IMBs louder and accomplish more of their goals.
