Tag Archives: mortgage product

Fintech and Mortgage Lending

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image by InvestmentZen, www.investmentzen.com

The Trump Administration released its fourth and final report on Nonbank Financials, Fintech, and Innovation in its A Financial System That Creates Economic Opportunity series. The report differs from the previous three as it does not throw the Consumer Financial Protection Bureau under the bus when it comes to the regulation of mortgage lending.

The report highlights how nonbank mortgage lenders, early adopters of fintech, have taken an immense amount of market share from traditional mortgage lenders like banks:

Treasury recognizes that the primary residential mortgage market has experienced a fundamental shift in composition since the financial crisis, as traditional deposit-based lender-servicers have ceded sizable market share to nonbank financial firms, with the latter now accounting for approximately half of new originations. Some of this shift has been driven by the post-crisis regulatory environment, including enforcement actions brought under the False Claims Act for violations related to government loan insurance programs. Additionally, many nonbank lenders have benefitted from early adoption of financial technology innovations that speed up and simplify loan application and approval at the front-end of the mortgage origination process. Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of  technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product. (11)

I am not sure that the report has its causes and effects exactly right. For instance, why would banks be more disincentivized than other financial institutions because of False Claims Act lawsuits? Is the argument that banks have superior lending opportunities that are not open to nonbank mortgage lenders? If so, is that market segmentation such a bad thing? 

That being said, I think the report is right to highlight the impact of fintech on the contemporary mortgage lending environment. Consumers will certainly benefit from a shorter and more streamlined mortgage application process.

Frannie Conservatorships: What A Long, Strange Trip It’s Been

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The Federal Housing Finance Agency Office of Inspector General has posted a White Paper, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A Long and Complicated Journey. This White Paper on conservatorships updates a first one that OIG published in 2012. This one notes that over the past six years,

FHFA has administered two conservatorships of unprecedented scope and simultaneously served as the regulator for these large, complex companies that dominate the secondary mortgage market and the mortgage securitization sector of the U.S. housing finance industry. Congress granted FHFA sweeping conservatorship authority over the Enterprises. For example, as conservator, FHFA can exercise decision-making authority over the Enterprises’ multi-trillion dollar books of business; it can direct the Enterprises to increase the fees they charge to guarantee mortgage-backed securities; it can mandate changes to the Enterprises’ credit underwriting and servicing standards for single-family and multifamily mortgage products; and it can set policy governing the disposition of the Enterprises’ inventory of approximately 121,000 real estate owned properties. (2)

I was particularly interested by the foreward looking statements contained in this White Paper:

Director Watt has repeatedly asserted that conservatorship “cannot and should not be a permanent state” for the Enterprises. Director Watt has indicated that under his stewardship FHFA will continue the conservatorships and build a bridge to a new housing finance system, whenever that system is put into place by Congress. In this phase of the conservatorships, FHFA seeks to place more decision-making in the hands of the Enterprises. (3)

Those who have been hoping that the FHFA will act decisively in the face of Congressional inaction should let that dream go. And given that just about nobody believes (I still hope though) that there will be Congressional reform of Fannie and Freddie during the remainder of the Obama Administration, we must face the reality that we are stuck with the conservatorships and all of the risks that they foster for the foreseeable future. Today’s risks include historically high rates of mortgage delinquencies and exposure to defaults by counterparties like private mortgage insurers. As I have said before, the risks that Fannie and Freddie are nothing to laugh at. Let’s hope that the FHFA is up to managing them until Congress finally acts.