the market share of shadow banks in the mortgage market has nearly tripled from 14% to 38% from 2007-2015. In the Federal Housing Administration (FHA) mortgage market, which serves less creditworthy borrowers, the market share of shadow banks increased by a staggering seven fold during the same period, from 20% to 75% of the market. In the mortgage market, “fintech,” lenders, have increased their market share from about 5% to 15% in conforming mortgages and to 20% in FHA mortgages during the same period.
Pointer from John Cochrane, who writes,
Maybe we want the crisis-prone traditional banking model to die out where it is not needed!
My thoughts:
1. Traditional banks do not have to hold loans. They can sell the loans they originate to FHA, Freddie, and Fannie just as easily as a “shadow bank” can. The ability to sell loans to the agencies cannot be the source of the advantage of the non-bank originators.
2. Using a web site to source loans is not a brilliant new innovation. Using a computer algorithm to approve loans is not a brilliant new innovation. An originator does not need to develop such an algorithm–Freddie and Fannie have been letting originators use their algorithms since the early 1990s. I doubt very much that technology is the source of advantage of the non-bank originators.
3. Ed Pinto, who follows the mortgage data closely, says that credit quality standards have been loosening dramatically, particularly in the “back-end ratio.” It used to be that you would not want to have a borrower whose total monthly debt obligations (mortgage payments, car payments, interest on credit cards, etc.) exceeded 30 percent of income. According to Ed, we are now seeing at the agencies, particularly at FHA, borrowers with back ratios of 50 percent or more.
4. If I were a traditional bank, and credit standards were loosening, I would let that business go to the non-bank originators. When the market tanked in 2007-2008, subsequently banks were shaken down by government officials for their “predatory lending” and hit with large “settlements.” Who needs to go through that again?
5. Non-banks need not fear a shakedown so much. They do not have nearly as much in assets for regulators to go after.
So my hypothesis is that the big advantage non-bank originators have in today’s market is that they have less to lose in a shakedown if another bust takes place.
Pinto should know the number was 28/36, front end and back end. At the same time, I would careful of Pinto’s “knowledge” of any part of the mortgage business due to his past performance in this area. Though that could just be driven by his ideology. I would like to see Pinto’s proof of his claims.
Meanwhile, back to story. Not shocking that companies focusing solely on originations are starting to take business away from the banks. And calling them “shadow banks” is beyond silly. I am thinking the thousands of mortgage brokers that have been around forever were not considered shadow banks(mainly cause they weren’t banks).
But there seemes to be a need for any topic about the GSEs to include terms like “shadow banks” to make its point.
“subsequently banks were shaken down by government officials for their “predatory lending” and hit with large “settlements.”
Well, predatory lending was a part of their crime. Fraud was another part.
And quite frankly, the banks were really happy they were just shaken down instead of receiving the death penalty. If the government wanted to let the investors loose on the banks(including F&F) in civil court, none of them would be around today.
After last year’s drought, corn markets have gotten way too hot. Until markets cool down, we need to crack down on seed companies.
There was no drought. Irrational consumers bid up the price of corn; irrational investors responded by frivolously investing in needless cornfields that were largely selling to corn speculators.
This is obviously the simplest explanation, and the obvious solution is to hyperregulate investors in corn crops.
Bottom line is, there’s way too much corn being grown, and what’s more, there’s excess demand for all that corn!
1) Local banks have not been the main originators for decades. They seem much more comfortable buying from a mortgage broker who grew after the S&L died.
2) It is very concerning FHA is buying that much. However, I always thought contradictory that the best mortgage balance sheet in 2008 was FHA but their role has been abused.
3) So far single ownership mortgage is still less than 2010 amounts and 3% higher than the 2014 lowpoint. For whatever reason it is not increasing. (I suspect low rates and increased 15 year mortgages are having a significant impact.)
“they have less to lose in a shakedown if another bust takes place.”
Isn’t that just a simple way of saying that they have less capital?
A lack of financial capital is how we got into 2007-2009 in the first place.
You have the cart squarely in front of the horse.
What caused the lack of financial capital? Defaults on payments reduced financial capital.