Garnet Capital Advisors Blog

Do you currently have a mortgage? Did you acquire that mortgage from a nonbank or a bank lender? If you've gone in search of financing in the past couple of years, the odds are greater that you used a nonbank.

According to Ginnie Mae data, the percentage of the government-sponsored enterprise's loan originations to nonbank lenders was only at 12 percent as recently as 2010. By 2014, that figure had ballooned to 51 percent. This is no isolated trend, either. Today's financial regulations are forcing more banks to leave the lending marketplace than ever before.

On top of that, the popularity of nonbank lenders is not the only consequence. The rise of nonbank lenders could have a negative effect on borrowers themselves, and Ginnie Mae could be the GSE that can provide a solution.

Oversight doesn't extend to nonbanks
The very regulations that are pushing many banks away from lending are the ones that should be applied to nonbanks. However, policing is sorely lacking among nonbanks, and while this has yet to become a serious problem, it has many in the industry concerned.

American Banker reported that nonbank lenders - partly due to a lack of regulations - are at risk of losing liquidity in the event of a downturn. As Ginnie Mae President Ted Tozer noted in a recent interview, Ginnie Mae's oversight of nonbanks is new ground for the GSE.

"These nondepositories are really good companies, they're really well-run, but the Achilles heel is liquidity," Tozer explained, according to American Banker. "Their financing structures are really complicated and we need the staff to analyze them."

The key point emphasized by Tozer is the crux of the concerns: "There's really no regulator when it comes to the financial stability of nonbanks."

What a lack of regulation could mean
Much of the regulations that are causing banks to turn away from lending were the result of improper banking practices prior to and during the Great Recession. As Dow Jones Business News reported, two examples in recent memory are Wells Fargo and Bank of America, which have both scaled back their lending due to legal settlements.

However, this has created a problem: Poor oversight led to improper lending, which contributed to the recession. Then came more stringent regulations, which caused many lenders to leave the market, opening the door for unregulated nonbanks to pick up the slack. We could end up right back where we started, if we're not careful.

That's where Ginnie Mae comes back into play. The GSE works closely with nonbanks to ensure liquidity, according to American Banker. Even so, Ginnie Mae stressed that resources are too few and far between to continue a high level of policing.

The bottom line is that concerns about nonbanks could trickle down to borrowers. If nonbanks are likely to fold in a downturn, the cost of credit will increase proportional to the rising lending risk. Where risk was once mitigated by regulations, it has now been moved into the nonregulated world of nonbanks.

At the end of the day, perhaps those regulations need to be extended to nonbanks as well - increased Ginnie Mae funding is one option - to further ensure that the consumer is protected.