Top mortgage executive doesn’t see nonbanks falling away even if the central bank rejigs capital requirements
The Federal Reserve may be about to shake up the mortgage market by making it easier for banks to lend in that space – but borrowers’ choice of lender will still ultimately come down to whoever can offer the best rate, according to a veteran executive.
Melissa Cohn (pictured top), regional vice president at William Raveis Mortgage, told Mortgage Professional America she didn’t view the recent proposals put forward by the Fed’s vice chair for supervision Michelle Bowman as a potential gamechanger for brokers and nonbanks.
While Bowman said the Fed wants to adjust the capital treatment of mortgage servicing rights (MSRs) among bank lenders, Cohn isn’t convinced that move will see a migration of borrowers away from the nonbank space.
“I think it boils down to one very simple thing, and that is what rates they will be offering,” she said. “My clients obviously want to make sure that it’s a reputable bank or lending institution that they’re borrowing from.
“But people care mostly about the rate and about the terms of the loan, and buyers will gravitate to wherever they’re going to be able to get the best deal – be it a bank or a nonbank.”
Bowman speech ‘doesn’t mean there’s going to be a major shift’
In her mid-February speech in Orlando, Bowman noted a big drop in the percentage of mortgages originated by the banking sector since the global financial crisis of 2007-08.
Then, banks accounted for about 60% of originations, she said, with servicing rights on around 95% of mortgage balances. But that market share has since dimmed to 35% of originations and 45% of servicing rights.
Bowman said the central bank wants to address that decline through two moves: firstly, removing the requirement that banks deduct MSRs from regulatory capital, while keeping a 250% risk weight and seeking comment on its appropriateness.
Secondly, mortgage risk weights could be tied to LTV (loan-to-value) buckets instead of a flat charge, which Bowman said would “potentially reverse the trend of migration of mortgage activity to nonbanks over the past 15 years.”
Still, she gave no specifics on a timeline for potentially amending rules to give banks greater leeway in the mortgage market.
And Cohn isn’t expecting big changes anytime soon. “Just because someone in the federal government says ‘We think more mortgages should be made by big banks’ doesn’t mean that there’s going to be a major shift in who’s originating what percentage of loans overnight,” she said.
“It’ll take months and years for any sort of shift in balance to occur, and it’ll only occur if the banks are going to be more competitive than the mortgage banks.”
Does the mortgage market really need more bank lending?
Brokers and other mortgage industry members have also raised questions since Bowman’s speech – namely, whether a shift away from banks in the mortgage space has really been a bad thing.
For Cohn, the growing prominence of nonbanks over the past two decades comes down to the fact that they’re often more aggressive and better at adjusting to the needs of buyers in today’s marketplace.
What’s more, a rising number of borrowers require non-QM and alternative lending solutions, which major banks are often reticent or unwilling to fund.
And that doesn’t seem likely to change even if the Fed incentivizes greater involvement by banks in the mortgage market, according to Cohn.
“I think you’ll find that a good part of that shift is into those types of mortgages that help people who don’t qualify conventionally to get financing,” she said. “And I don’t know that freeing up more capital for a bank to make a mortgage is going to turn them into a non-QM lender.
“It’s not necessarily going to change the rate at which they’re willing to make a mortgage. These big banks are big ships. They have big overhead. Mortgage banks are leaner machines and they have less real estate so less overhead, and it’s easier for them to offer a better rate and still make money.”
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