Garnet Capital Advisors Blog

EXCERPT:  Nonbank mortgage volume has overtaken traditional banks, with about half originated by nonbank lenders. This may be cause for concern should financial stress occur.  

Nonbank lenders are now extending more loans than their traditional banking counterparts.

Over the past decade, nonbanks have increased their share of mortgage originations and are now covering approximately half the market, according to the Financial Stability Oversight Council’s (FSOC) latest report.

More specifically, nonbanks are currently originating 51 percent of all new home loans compared to a mere 10 percent at the peak of the subprime mortgage debacle a decade earlier. Following the housing crisis, banks were discouraged from offering mortgages to riskier borrowers, especially after dealing with a slew of foreclosures and the wrath of legal and regulatory issues as a result. Regulations and fines related to origination and mortgage lending also became much more stringent, scaring off legacy bank lenders, eventually opening the door for nonbank lenders to swoop in.

The Growth of Nonbank Lenders

These alternative lending institutions have rapidly made their way into the lending sphere, filling a void left by traditional banks when it comes to servicing consumers and providing more innovative digital lending platforms. The rise of the nonbank lender has fueled a spike in fintechs, which have become extremely popular among the more digitally savvy consumer.

But while nonbank lenders play a crucial role in providing loans and banking products to certain segments of the market - including borrowers with subpar credit - and adding more competition and liquidity to the market, they've also created concern in the industry in terms of changing the landscape of lending. The rapid expansion of alternative lenders poses a threat to conventional bankers and to the stability of the ecosystem.

The housing crisis from 2007-2009 discouraged banks from extending mortgages, leaving room for nonbanks to take over home loan originations for riskier borrowers.

That said, many banks have since teamed up with nonbank lenders, with benefits of such partnerships for both. Further, nonbank lenders continue to add value to the industry by improving borrower access, spurring competition, bringing in new capital to the lending markets, and driving innovative technology.

Nonbanks Could Be a Source of Trouble in the Event of Financial Pressure

But considering the sheer volume of home loan originations that nonbanks are originating, they could be a potential risk to the financial industry if they come upon hard times and undergo some level of financial trouble. Since they do not have a full banking license in the way that traditional banking institutions do, they're not bound by the same level of regulation. Further, they aren't as highly capitalized as banks, and in times of financial stress, this could pose an issue, especially considering the fact that they now hold around half of the new mortgage market.

The majority of nonbank mortgage companies don't have adequate resources to absorb any economic shocks and depend more heavily on short-term funding compared to traditional banks.

Banks, Nonbanks and Credit Unions Alike, Need Support From a Seasoned Loan Sale Advisor

In an environment where economic uncertainty exists and where a downturn in the near future is always a possibility, nonbanks - as well as their traditional banking counterparts - must revisit their loan portfolios and establish a strategy to sell off weaker, shorter-term loan assets to keep their balance sheets as robust as possible. In turn, lenders should acquire stronger-performing assets in their place.

To carry out such transactions successfully, financial institutions should team up with an experienced loan sale advisor like Garnet Capital to help make those sales and acquisitions happen.

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