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This Is Not A System That Has Ever Been Tested In A Time Of Stress

A report from the Wall Street Journal. “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions.”

“The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn.”

“For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month. In the meantime, it has been granting approvals with shorter time frames to the lenders.”

“Ginnie has also undertaken its first stress tests of business partners. The exams look at how lenders’ and servicers’ monthly cash-flow obligations would hold up if they reduced loan production and margins while increasing delinquencies. The results are expected shortly.”

“Ginnie is particularly exposed to nonbank lenders. These firms service 61% of loans in securities issued by Ginnie, up from 34% at the end of 2014. What’s more, Ginnie’s outstanding issuance of mortgage bonds has grown fivefold since the financial crisis to $2 trillion. ‘It’s uncharted territory,’ Ms. Kasper said.”

“Neither Ms. Kasper nor others in the industry expect chaos in the mortgage market. But with mortgage refinancing recently falling to its lowest level in 18 years, nonbank lenders face new strains. Government officials and economists are concerned that many of these companies may not be able to tap the more stable sources of financing available to bank lenders if they face a cash crunch.”

“Last year, there were 31 mergers and acquisitions in the mortgage industry, nearly three times the amount in 2017, according to Stratmor Group. Moody’s Investors Service said that about a third of the nonbank mortgage lenders graded by the rating company aren’t profitable right now, which means they likely need waivers from their own lenders to be able to keep accessing cash to make mortgages. It didn’t name the companies.”

“While Ginnie executives have been flagging this issue for years, it is gaining a wider audience as nonbank lenders have struggled over the past year. In a paper last year, economists at the Federal Reserve raised concerns over unique funding challenges that nonbank servicers face, especially for those who manage payments on Ginnie bonds.”

“‘This is not a system that has ever been tested in a time of stress,’ said Karen Pence, one of the authors, in presenting her findings at a Brookings Institution conference last year. ‘We question whether it is wise to concentrate so much risk in a sector of the economy that has little capacity to bear it and has a history, at least during the financial crisis, of going out of business.'”

“There isn’t any single agency responsible for directly overseeing such nonbank entities.”

This Post Has 45 Comments
  1. ‘Moody’s Investors Service said that about a third of the nonbank mortgage lenders graded by the rating company aren’t profitable right now, which means they likely need waivers from their own lenders to be able to keep accessing cash to make mortgages’

    Just like that, the establishment tells us this sh$t-cart is going down.

    Wasn’t it last week the WSJ told us about a non-bank lender making a $600,000 liar loan to a baby sitter?

    1. Didn’t we just read from the Freddie Mac economist “you need an element of speculation or credit financing involved as well” for a bubble… well here you go Kiefer!

      1. From the link:

        ‘Ginnie’s mortgage-backed securities are made up mostly of loans insured by the Federal Housing Administration and the Department of Veterans Affairs, which generally offer the easiest lending terms available today. VA loans don’t require any down payment, while FHA-backed mortgages require buyers to put down 3.5%. Average credit scores on FHA loans have been falling and debt-to-income ratios have been rising.’

        ‘If homeowners default on their mortgages, these nonbanks are on the hook to continue advancing payments to investors, tax authorities and insurers until they are repaid by the government. Such outlays could compound financial problems for firms that are already struggling. In a worst-case scenario, companies could close without a buyer to purchase the servicing rights. That would force Ginnie to orchestrate the transfer of servicing and take other actions to ensure the orderly functioning of the market.’

        1. ‘Average credit scores on FHA loans have been falling and debt-to-income ratios have been rising’

          This is the risk layering the guys at AEI have been shouting about for years. The writer makes it sound like this has been occurring as a bottle floats at sea. Oh no, this is part of the huge federal effort to reflate the bubble since 2014. Remember petal to the metal Mel Watt? He wasn’t joking.

          And the most incredible thing about this FHA situation is, they are supposed to be counter-cyclical (Fannie/Freddie are pro-cyclical lenders). That means everybody went petal to the metal in 2014 and it also means there isn’t any entity left to go counter-cyclical when the whooie hits the fan!

          1. And yet, still, the REIC thinks all is well and lending is sound. I can’t recall a refi recently that was strictly a rate term where a borrower is obtaining a lower rate. Since rates dropped from 5.25% last Fall to 4.25% today….all I’m seeing is refi’s where people are moving all their consumer debt onto their homes via “debt consolidation.” Yep, push the CLTV up to nosebleed level. I’ve always said tongue-in -cheek “do you know what your neighbors or neighborhood CLTV is?” I argued people should be scared as hell if your neighborhood CLTV is at or over 80%. I’m guessing but it would not surprise me that some of the new or newer housing developments sprouting up (mid tier prices or affordable housing) the neighborhood CLTV is well over 80%.

          2. Serious question S-Crow — How could I find out, or make a reasonable guess as to, a neighborhood’s CLTV?

          3. Aren’t mortgage-backed securities the real problem? Same financial instrument, different player (nonbank vs bank mortgage lender), same result (taxpayer bailout)?

          4. Fannie Mae deliberately raised its DTI from 45% to 50% in 2017; it wasn’t the borrowers that just drifted up. And FHA can apparently go even higher.

            Just googling to get those numbers opens up a world of terrifying message boards of highly-indebted future FBs and their mortgage brokers finding ways around these “limits.” Here’s just one example of number crunching to get a 57% DTI loan:

            https://ficoforums.myfico.com/t5/Mortgage-Loans/Lenders-that-accept-gt-50-DTI/td-p/5012825

        2. That would force Ginnie to orchestrate the transfer of servicing and take other actions to ensure the orderly functioning of the market.’

          And pretty soon the Fed owns more houses.

      2. 4 gawd$ $ake … Like the note$ on a piano, It’$ all laid out for everyone to $ee!

        “some may not have the financial heft needed to overcome stre$$ed condition$.”

        “but haven’t yet been te$ted by an economic$ downturn.”

        “how lender$’ and servicer$’ monthly ca$h-flow obligation$ would hold up if they reduced loan production and margin$ while increa$ing delinquencie$. The result$ are expected $hortly.”

        “out$tanding i$$uance of mortgage bond$ has grown fivefold since the financial cri$is to $2 trillion$. ‘It’s uncharted territory,’”

        “need waivers from their own lender$ to be able to keep acce$$ing ca$h to make mortgage$. It didn’t name the companie$.”

        “economist$ at the Federal Re$erve raised concern$ over unique funding challenge$ that nonbank $ervicers face.”

        “‘This is not a $ystem that has ever been te$ted in a time of stre$$,’”

        & 4 thee pièce de rési$tance:

        “There isn’t any single agency responsible for directly overseeing such nonbank entities.”

        “Uh Oh!”

        tra la la BOOM de A! … tra la la BOOM de A!

  2. https://www.google.com/amp/s/www.wsj.com/amp/articles/cooling-housing-market-prompts-closer-scrutiny-of-some-lenders-11548759600

    Non paywalled version of the article above.

    Snip from the article that caught my attention:

    “Still, potential vulnerabilities from nonbanks could test the ability of postcrisis regulations to address problems that crop up outside the regulated banking sector. In a worst-case scenario, disorderly failures of nonbank servicers could lead to losses at Ginnie that ultimately cost taxpayers.”

  3. “Neither Ms. Kasper nor others in the industry expect chaos in the mortgage market.

    Here we go again with the so-faux “Nobody saw this coming” claims.

  4. “There isn’t any single agency responsible for directly overseeing such nonbank entities.”

    Of course not. The financial services industry and its lobbyists made damn sure that captured policymakers would “neglect” to impose such oversight. Instead, we get the likes of Senator Running Deer bloviating for the cameras about her commitment to the middle class, while not lifting a finger to curb systemic financial system recklessness, greed, and fraud.

    1. her commitment to the middle class

      Ironically, I take that to mean that my retirement savings are not beyond her grasp.

      1. Watch out, her brother might get in your face and beat a drum. Responding with a mere smile means you and your family should be exterminated according to the progs.

    2. Well, she did create the Consumer Financial Protection Bureau which the administration has been fighting to shut down.

  5. “…Maren Kasper, who stepped in as Ginnie’s acting head this month…”

    “…Neither Ms. Kasper nor others in the industry expect chaos in the mortgage market….”

    Well, here we go again.

    When the next meltdown does happen (and it will), MSM will report “Maren Kasper, head of GinniMae says “No one could of seen this coming”

    BTW, Weren’t GSE’s Fannie Mae and Freddie Mac supposed to have been legislated out of business? What ever happened to that idea?

  6. ‘This is not a system that has ever been tested in a time of stress,’ said Karen Pence, one of the authors, in presenting her findings at a Brookings Institution conference last year.

    Sounds more like flea market vendors picking out spots than a system Karen. And just when were you guys planning on telling us this since last year?

    ‘We question whether it is wise to concentrate so much risk in a sector of the economy that has little capacity to bear it and has a history, at least during the financial crisis, of going out of business.’

    Well, like a doughnut shop or any other here today gone tomorrow operation, going out of business is what they do when the money runs out. Is this a surprise? And apparently one third of them are already done.

    Aren’t we lectured every – single – day, about how super duper the loans are today – that’s why there is no bubble! And didn’t Senator Running Deer tell us this could never happen (again) cuz she fixed it by golly.

        1. WestWorld5 – WAKE UP!!! It’s not about Democrats vs Republicans. It’s about globalists seeking to divide this country and enrich themselves.

    1. “wise to concentrate so much risk…”

      It sounds like that was the whole point, to foist off risk onto a straw man entity that goes poof when things turn sour. A nonbank seems like nothing but a special purpose vehicle of a real bank.

      1. None of these smart boys seem to give specifics on who owes who how much and how much of it is guaranteed by the Feds.

        1. Exactly. Who forecloses when the nonbank goes out of business, the gov’t refuses to pay claiming the loans are fraudulent, there are multiple liens against the property (local, state, federal tax, HOA, 2nd mortgage), and the original loan has been broken up and securitized to dozens of investors?

          The article says Ginnie Mae may have to take over servicing. But with loan guarantees spread out across FHA, VA, Fannie, Freddie, HUD, the Department of Agriculture and who knows who else, how will these ever be catalogued much less processed?

  7. May 25, 2018

    “In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star. Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent. Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. ‘If he can help me, he can help anyone,’ Taylor says. ‘My credit history was just horrible.’”

    “Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk. Many borrowers ‘are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,’ says John Burns, a housing consultant.”

    “One reason more borrowers may be stretching: Real estate prices are soaring again.”

    http://thehousingbubbleblog.com/?p=10443

  8. “Next, the Cleveland Cavaliers of the NBA, the team that Gilbert owns, has roughly quadrupled in value since Gilbert bought the team in 2005 for $375 million. Forbes estimates the team today is worth $1.325 billion.

    But major sports franchises are expensive to operate. Forbes estimates the team’s annual revenue at $280 million and says the team operates in the red, losing $6.2 million on operations last year. That’s another cash drain.”

    Better sell them quick …

  9. “Average credit scores on FHA loans have been falling and debt-to-income ratios have been rising.”

    And at the same time this has been happening prices of houses have been rising.

    Think about this: The higher the price rise of houses the closer to the top prices get. This statement could only be false if there is no top to the market. If you believe there is no top to this market then you are an idiot.

    At the same time that the prices of houses have been rising the average credit scores on FHA loans have been falling and debt-to-income ratios have been rising. What this means is as the prices of houses have been rising – as prices have relentlessly approached the top of the market, the risks to the lender has increased due to the falling of tge credit scores and the rising of the debt to income ratios.

    Only in a nation populated by a bunch of dummies could this stupid situation be tolerated.

    1. “Average credit scores on FHA loans have been falling and debt-to-income ratios have been rising.”

      Exactly why the government backstopping of the mortgage industry needs to be withdrawn immediately… like removing a band-aid.

    2. Also think about this:

      If a housing price rise creates equity wealth for the comps and if this price rise is the result of people with ever-shaky credit scores and ever-risky debt to income ratios doing the buying, doing the bidding up of house prices, then what does this say about the QUALITY of this price rise and the QUALITY of the resultant equity wealth created by this price rise?

      Sumtin’ to think about.

      1. We know the quality is crap. That’s why we’re here…it’s the one things I think we all have in common.

  10. “If homeowners default on their mortgages, these nonbanks are on the hook to continue advancing payments to investors, tax authorities and insurers until they are repaid by the government.”

    This is very helpful. Until now, I didn’t understand that nonbanks had promised to pay defaulted mortgages, taxes and insurance to investors until the gov’t guarantee is honored.

    No wonder investors buy these loans – they have two separate parties guaranteeing to pay up if the FB defaults! Never mind that the nonbank will be out of business. And what’s to stop the gov’t from refusing to pay up on the grounds that the nonbank was making reckless loans?

    1. And what’s to stop the gov’t from refusing to pay up on the grounds that the nonbank was making reckless loans?

      The howling of millions of boomers whose main source of wealth is tied up in the inflated value of their house and who stand to lose their equity if housing prices deflate.

      1. The howling of billionaires who might lose money on their non-bank investment? Last time that counted a lot more than the people losing money on their houses.

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