The Rise of Nonbank Mortgage Lending: The unbundling of originating servicing funding and investing of mortgages has been driven largely by regulatory arbitrage.

• Author: Calabria, Mark
• Position: FINANCE

Citibank, Wells Fargo, Bank of America, JPMorgan Chase--all are household names. If you are like most Americans, you have an account with one of them. Despite their continued dominance of our financial markets, however, these banks have become increasingly less relevant in the mortgage market. More and more, the originating and servicing of mortgages are being conducted by nonbank financial service companies with less familiar names, like Lakeview, PennyMac, Carrington, LoanDepot, and NewRez.

Perhaps you went to your bank to get a mortgage. Or maybe a fancy Super Bowl ad enticed you to get your mortgage with a nonbank lender. In the former case, the bank or credit union might keep your mortgage on its books. In the latter case, the nonbank lender almost always sells your mortgage to someone else, often Fannie Mae or Freddie Mac, the giant government-sponsored enterprises at the heart of American housing finance. But the lender does not always sell all of your mortgage; many lenders retain the right to service your mortgage.

The company from which you received your mortgage is the originator. The originator can be a traditional lender, such as a bank or credit union. The originator can be a mortgage banker, who relies on short-term ("warehouse") money to fund your loan until it sells the loan to another entity, which may or may not be the ultimate investor. Your originator can also be a mortgage broker, who arranges the terms of your loan, but the short-term funding as well as the ultimate funding of your mortgage will be performed by someone else.

The servicer is the entity that receives your monthly mortgage payments. In the old days, it was to whom you mailed your check, but now that is mostly done electronically. Once the servicer receives your payment, it forwards most of the money to the ultimate investor while retaining some portion to pay your property taxes and make insurance payments.

The servicer also plays a critical role when something goes wrong with the loan, such as when a borrower can no longer pay. The servicer interfaces with the borrower, offering mitigation options such as forbearance or an arrangement of a short sale if the mortgage is no longer sustainable. In the unfortunate instance of a foreclosure, the servicer is also responsible for maintaining the property in good condition. Servicers perform a variety of recordkeeping and reporting obligations related to the mortgage as well. In a general way, the servicer is the entity that administers or manages your mortgage.

The Conference of State Bank Supervisors, a trade association representing state bank regulators, estimates that within the United States there were 19,655 active nonbank mortgage companies as of April 1, 2021. About 80 percent of them were mortgage brokers, which do not make or fund the loans themselves. Most of the 4,978 federally insured banks, of which the Federal Deposit Insurance Corporation (FDIC) considered only 270 as specializing in mortgage lending, also originated mortgages. The 5,068 federally insured credit unions also made mortgages, although only to their eligible members.

To make the topic even more complex, originators can be servicers and servicers can be originators--but they do not have to be.

RISE OF NONBANK MORTGAGE LENDERS

Before the Savings and Loan Crisis of the 1980s, it was most common for the originator, servicer, and investor in mortgages to all be the same institution. While there has long been an active mortgage banking industry--going back to at least the 1870s--in which loans were originated and then sold to investors such as life insurance companies, even those mortgage bankers were both originator and servicer. They also did not dominate the overall market, except in then-frontier areas lacking established deposit-taking banks.

The 1980s collapse of the savings and loan industry is still being felt in the mortgage market today. The disappearance of thousands of thrifts opened the door for mortgage bankers to gain considerable market share. This expansion of mortgage companies would not have been possible had it not been for the willingness of Fannie Mae to massively increase its buying of mortgages, taking on the credit risk once borne by the savings and loans. At the time, Fannie Mae operated mainly as...