Nonbank mortgage companies owned the servicing rights for just 4% of mortgage balances in 2008, according to federal regulators. By 2022, that number exploded to 54%. In total, nonbanks serviced about $6 trillion in mortgages for the government-sponsored enterprises last year, with six holding portfolios in excess of $450 billion apiece.
These financial institutions bring strengths to the mortgage market such as being early adopters of technology and showing a willingness to serve Black and Hispanic borrowers, according to the Financial Stability Oversight Council (FSOC), a group of top financial regulators led by the U.S. secretary of the Treasury.
But there’s concern that the mortgage servicing rights are concentrated so heavily in nonbanks.
Regulators suggested that they may have difficulty enforcing borrower protections or minimizing taxpayer losses if a large nonbank or several midsize ones fail. That’s why the council recommended new oversight and liquidity requirements this past spring.
Towne Mortgage Company CEO Mark Janssen and a longtime member of the Community Home Lenders of America spoke to Scotsman Guide about the rise in nonbank servicers. He also spoke about why he doesn’t think these institutions pose a systemic risk.
Were you surprised to see nonbanks retaining the servicing rights of so many mortgages?
No, not really. Banks stepped back during the financial crisis, started selling servicing, scaling back the wholesale channel followed by correspondent channel. That continued, not as aggressively, after the financial crisis and then was accelerated during the COVID years. That void needed to be filled and IMBs (independent mortgage banks) were there to fill it.
How do nonbanks generate money off servicing rights?
Servicing fee revenue essentially, less cost to service. It’s harder to scale for companies like mine that are smaller. Most IMBs are smaller, there are some very large ones that can scale. So ability to scale limits (the ability to generate revenue off servicing rights), but it’s essentially servicing fee less cost to service.
When you retain the servicing rights, you’re still selling the loan on the secondary market or to the GSEs, right?
Right. Fannie, Freddie, Ginnie. We’ll earn typically on a Fannie or Freddie loan 25 basis points (annually). An IMB’s cost to service might be anywhere from 5 basis points upward of 15-16 basis points.
Does Towne Mortgage retain servicing rights?
We do. Today we’re retaining about 60%. During the COVID years, we were retaining 95%. The market today for aggregators is a little bit more active and aggregators are paying up a little bit more for a variety of reasons. So, we’re selling more today.
So it’s a profitable revenue source for nonbanks?
Retaining servicing rights? Yeah, depending on the interest rate environment and the pay offs and those types of things, yes, generally speaking.
The FSOC report praises nonbanks for embracing technology and reaching underserved borrowers. Are you seeing that yourself?
Oh yes. Generally, IMBs serve underserved borrowers much better. IMBs are typically more accommodating, slightly higher (debt-to-income ratios), slightly lower FICO, slightly higher (loan-to-value). They all fit within agency parameters, but banks are looking for the more vanilla customer.
The report expresses concerns over servicing rights being concentrated on nonbanks. Do they have a point?
I think IMBs pose very little systemic risk. There (are more than 200 IMBs) and I think there are around 350 Ginnie issuers today. There are some large ones, but they’re not backstopped by taxpayer money. They’re not backstopped by the FDIC. I’m confused by the risk.
There is far more regulation on an IMB than a bank, so we have the typical mortgage banking industry regulations, but I’m in 44 states, so I have to follow 44 different state regulations. We also have the CFPB (Consumer Financial Protection Bureau), so we’ve got the general regulatory environment that everybody has.
What would happen if there were more regulation or liquidity requirements for nonbank servicers?
The cost for the consumer goes up simply. More regulation hurts lower-income borrowers proportionally more as their loan sizes are smaller and the cost of increased regulation per loan has a bigger proportional impact. The cost of the compliance department has skyrocketed in the last 10 to 15 years. That money’s got to be paid and it flows downhill. ●
