TWICE IN THE Housing finance has driven the US economy down over the past 30 years. As interest rates rise and the housing market falters (see article), regulators are once again reflecting on the risks in the mortgage market, this time of a slide to non-bank originators.

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These companies, which create mortgages and often resell them to other institutions, exist outside the banking regulatory framework. They now represent 44% of loans from the top 25 principals, against 9% in 2009, according to Inside mortgage financing, a commercial publication. Five of the top ten are non-banks, as is the largest retail mortgage originator, Quicken Loans. Their market share for mortgage loan management, or monthly payment collection, increased from 5% in 2009 to 41% in 2018.

Part of this change reflects the marketing and customer service of non-banks. Instead of waiting for a distracted bank branch employee to type information into an old computer, Quicken offers a smartphone app and responsive help lines.

But banks have also pulled out of the market. Most home loans are issued by private institutions and then sold to government sponsored entities, such as Fannie Mae and Freddie Mac, who securitize them. (Lower credit quality mortgages tend to be sold to another public company, Ginnie Mae.) In theory, this should shift the risk to the originators. But when mortgages deteriorated during the financial crisis, banks found themselves forced to repossess some of their mortgages or ended up paying fines. When they repossessed their homes, they were harassed by state governments. Refusing to bear these risks again, some banks have ceded ground to non-banks.

This does not mean that they have completely left the field. The period between the issuance of a mortgage and its resale is usually financed by bank loans. As an article from the Brookings Institution, a think tank, notes, when banks stopped lending during the financial crisis, the number of mortgage companies halved. The mortgage management business can become capital intensive if a mortgage goes awry. The service company has to bear the costs until the mortgage is paid off, which can take years.

As a result, although banks play a less direct role in the mortgage market, they are still indirectly exposed. Jelena McWilliams, Director of the Federal Deposit Insurance Corporation (FDIC), noted in a recent speech that banks’ exposure to non-banks increased from $ 56 billion in 2010 to $ 376 billion in June of this year.

Much of these non-banks are still unknown. Most are private: little information is available on their ability to survive a housing downturn. Their finances may be fragile: Christopher Whalen, analyst, estimates that more than half of them “exceeded their bank credit commitments because of depreciated capital, poor profitability or both”. He expects 10% of them to close this year. As Ms. McWilliams pointed out, America regulates the entity rather than its business. This approach means that the threats to housing finance are constantly evolving. Regulators need to be nimble.

This article appeared in the Finance & economics section of the print edition under the title “Homing in”

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