IMB and its bridges to affordable housing

Last week, Senator Elizabeth Warren submitted a letter She wrote to the Financial Stability Oversight Council asking them to implement impact regulation on non-bank institutions to mitigate their risks to the entire financial ecosystem. Her letter cited non-bank mortgage lenders, often called independent mortgage lenders, as entities that should receive more scrutiny. However, this greatly exaggerates IMB’s risks and will put minority and other underserved first-time homebuyers at risk.

After the 2008 crisis, banks began to stop originating and servicing mortgage loans, and many banks simply fell back on providing warehouse loans only to IMBs or only purchasing loans issued by IMBs. In the direct-to-consumer lending market, IMB stepped in — now originating about 70% of new mortgages. As the source of credit for approximately 90% of FHA, VA and Rural Housing Service (RHS) loans, IMB plays an extremely critical role in advancing the American Dream for low- and moderate-income and racial minorities.

in a report urban instituteAnalysts note that IMB offers much higher interest rates on loans to borrowers of color than banks, which are large financial institutions located in communities of color, nearly 4% higher.

Unfortunately, policymakers have been too quick to classify IMBs, especially the larger IMBs, as financially risky institutions; making them easy targets for more stringent and unnecessary federal oversight and regulatory efforts. The reality is that IMBs already experience strong state and federal regulation, and the typical IMB is subject to numerous state examinations and routine performance monitoring by the FHFA, GSE, and Ginnie Mae.

The second reality is that while the larger IMF may issue loans like banks, they are significantly different in that they are not risk-bearing entities. Rather than buying and holding assets like banks, nonbanks transfer their credit risk to government-backed loans such as the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac. , in return for receiving fees for making these loans to government-sponsored entities.

Despite these hard-defined facts, policymakers continue to draw conclusions from e.g. Silicon Valley bank collapse It is concluded without evidence that there must be reasons to worry about IMB and reasons to expand supervision of IMB. But this ignores the reality of how IMBs do business and the fact that taxpayer and systemic risk to these entities is extremely low.

Misguided overreaction and overregulation of IMBs will not only harm these entities, but also millions of minority and underserved families who hope to one day own a home and increase their intergenerational wealth . They rely on the fact that IMB leads the market in access to mortgage credit and creates more affordable mortgages for these households.

A good example is FHA loans – which dominate first-time homebuyer lending by servicing qualified borrowers with low down payment abilities and minor credit deficiencies. FHA relies on Ginnie Mae to securitize its loans, and IMB now issues 90% of Ginnie Mae securities.

IMB issuers are not seeking a bailout. However, Ginnie Mae’s plan requires them to act as bankers to defaulting borrowers through advances, which could create a liquidity squeeze in a tight economic environment. Banks that service mortgages have a plethora of liquidity sources – such as FDIC insurance, FHLB advances, and cheap federal funds. But IMBs do not have the liquidity facilities to help them meet growing demand for prepayments for services.

Ted Tozer, former president of Ginnie Mae and current researcher at the Urban Institute, proposal However, since this may take some time to integrate, in the short term, the easiest option is to expand the Direct Access Assistance Program (PTAP) program.

Ginnie Mae created the PTAP program in spring 2020 in response to concerns about the impact of the coronavirus pandemic on borrowers’ ability to make mortgage payments and on federal agencies’ forbearance authority given by Congress to issue loans. Considering that 90% of Ginnie Mae securities are serviced by IMB, expanding such programs will promote the sustainability of the lending ecosystem by increasing access to mortgage loans and increasing warehouse lenders’ confidence in the issuer. PTAP will continue to provide IMB with the flexibility to borrow for underserved and first-time borrowers while also providing greater financial security.

Homeownership is a privilege that every American should enjoy equally. More regulation always sounds good on paper, so who can argue with that? But the reality is that over-regulation of the IMB will have real-world consequences. A continued unjustified focus on non-banks may prove to only hurt communities of color and first-time homebuyers, whom IMBs serve far better than any other segment. Policymakers should spend their time focusing on long-term security solutions.

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