However, one mortgage attorney doesn’t see changes anytime soon
Michelle Bowman got the attention of the entire mortgage industry last week with her comments that seem to indicate a willingness to get banks more involved in mortgage lending once again.
The vice chair for supervision at the Federal Reserve noted that in 2008, banks originated around 60% of mortgages. By 2023, that percentage had dropped to about 35%. Servicing rights took a bigger plunge, falling from around 95% in 2008 to 35% in 2023.
Previous changes to banking rules opened the door for this shift to non-bank and independent mortgage bank providers and servicers. One mortgage attorney said while this could start to swing the momentum back to banks, it might not be a bad thing for brokers.
Marty Green (pictured top), principal at mortgage law firm Polunsky Beitel Green, said Bowman could be implying that there is some risk in too much of the mortgage industry escaping traditional banks.
“I think what she is suggesting is that we need to take a fresh look at that regulatory framework,” Green told Mortgage Professional America. “Probably relaxing how mortgage servicing rights are accounted for on the bank's balance sheets. Really taking into consideration what the risks are with respect to those assets, as well as mortgages on the balance sheet and those assets, to encourage banks to be greater participants in the mortgage space overall.
“Because, as she outlines in her speech, how much banks have had their market share reduced. If you go back to 2008 and compare it to now, it's pretty dramatic as to the shrinking role that they have played, and that there's some systemic risk to having too high a concentration of mortgage servicing in non-bank entities.”
Potential risks on both sides
Green noted that if there was a liquidity issue, servicers might not be in a good position to handle it the same way a bank would.
“If you get into a liquidity event where servicers are having to make a lot of advances,” Green said. “Because it becomes so expensive for them to do it, you could have some servicers that would be in a world of hurt and not necessarily a likely player to take over that servicing. It's quite likely that another servicer might be subject to the same liquidity pressures that might be causing a concern.”
A push to send more of the mortgage lending and servicing back to the banks could have unexpected consequences as well, Green said.
“I think they need to be thoughtful about it,” he said. “I think the concern would be: are you endangering your banking system by pushing them back into a mortgage space? That could be dangerous. If you look back at the 2008 financial crisis and some of the stresses that were placed on the financial system. At least in 2008, you had banks that were much higher participants in it, and so you had a greater ability to weather that storm.”
Despite the potential concerns, Green thinks that getting banks back into mortgage lending more heavily would benefit the industry overall.
“I think generally, it's probably a good thing to have greater bank participation in it,” Green said. “I think if they didn't have the negative treatment with respect to the mortgage servicing rights, banks might be more interested in being in the mortgage space overall. Having those additional participants may be helpful to the marketplace as a whole.
“It might increase the prices for mortgage servicing rights, because now you have other players who are interested in buying those, where right now they don't have the incentive to do so because of the way the financial accounting works.”
Benefits for brokers
While there are some initial concerns about the impact this could have on mortgage brokers, Green isn’t convinced that it would necessarily be bad for brokers. He thinks banks might have to expand their network of originators, which could move into the wholesale space.
“What we've seen in the last few years is those retail networks have kind of shrunk and been more consistent with where the banking footprint is,” he said. “Rather than expand that retail network in the way they may have done in the past, they may look more at correspondent or at other options for them to participate in the space that might be less intensive than a retail platform would be.
“I think there could be a lot more wholesale opportunities for brokers out there if banks were to be in it, in the space, more so. And that might be a really helpful thing overall for brokers as well.”
However, none of this is likely to happen quickly. This commentary came directly from Bowman, and not as an official Federal Reserve stance. Green said don’t be surprised if meaningful change on this front doesn’t happen until at least 2027.
“I think this will be a while, because what you've seen with basically with Bowman, is her floating the concept,” Green said. “Then you may see some initial proposals that will be put out for comment. From the commentary stage, you go to rulemaking. I think you have an elongated process here. I think this is early stages. In terms of really seeing a meaningful impact in the market, you're not going to see anything until probably next year at the earliest.”
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