Many banking giants in the United States got out of the home loan business following the 2008 financial crisis, with nonbanks like Rocket and Pennymac taking their place, the report said. New rules created in response to the Wall Street meltdown required lenders to set aside more money to cover potential losses related to mortgages.
In 2008, banks originated roughly 60% of mortgages and serviced around 95% of mortgage balances, the report said, citing Federal Reserve data. Fifteen years later, those percentages had fallen to a respective 35% and 45%.
However, Michelle Bowman, the Federal Reserve’s vice chair for supervision, outlined a plan Monday (Feb. 16) that would reduce the amount of money banks must set aside for mortgage operations.
Speaking at the American Bankers Association’s Conference for Community Bankers, Bowman said the plan would let banks hold less money to cover losses for borrowers who make larger down payments. The change would also deal with the way mortgage-servicing rights, or the right to manage home loans and collect payments, are treated on a bank’s balance sheet, giving lenders more space to expand their mortgage businesses, per the report.
The thinking behind the plan is that nonbanks, which tend to be regulated at the state level, don’t have the same protections as traditional banks, such as the ability to take out emergency government loans during a crisis, the report said.
Traditional banks also have a bigger financial cushion thanks to their more diversified businesses, giving borrowers more protection during events like the pandemic, according to the report.
Isaac Boltansky, head of public policy at nonbank lender Pennymac, said in the report that nonbank lenders have successfully navigated rocky interest-rate cycles.
The proposed changes are happening as the dream of homeownership has become a source of financial fragility for millions of American households. A combination of rising home prices, sticky inflation and the delayed impact of interest rate increases has turned a rising share of homeowners into paycheck-to-paycheck survivors.
“At the heart of this reckoning is a significant shift in borrowing behavior,” PYMNTS reported in August.