This week, the Community Home Lenders of America (CHLA) released a special report entitled “The Ubiquity of IMB Regulation.” This report is important to independent mortgage banks (like Atlantic Bay Mortgage Group) that are increasingly dominating mortgage markets and leading the market in serving minority and underserved borrowers.
Unfortunately, the growth of IMBs over the last decade has opened IMBs up to increasingly strident attacks. We have witnessed a steady drumbeat of claims — that IMBs are “risky,” that they are largely unregulated.
The CHLA report exposes how the “IMBs are risky” myth often relies on misrepresentations about how programs like Ginnie Mae and FHA actually work — and ignores the fact that these programs have strict underwriting standards, strong profitability and record levels of capital.
The report also points out how IMB critics bootstrap legitimate concerns about largely unregulated nonbank financial products like crypto or payday lending to claim similar risks for IMBs, even though mortgages are more extensively regulated than any other financial product in the wake of the 2008 crisis.
But the biggest myth of all is that IMBs are unregulated.
To rebut this, the CHLA report comprehensively lists the numerous financial regulations that IMBs are subject to. Are these bank-like capital standards? No — for the simple reason that unlike banks, IMBs don’t have FDIC-insured deposits, don’t receive FHLB advances, and don’t have access to the Fed discount window. There is no direct taxpayer risk if an IMB goes under.
Instead, extensive financial and program requirements are tailored to the specific federal agency loan programs an IMB participates in. For IMB Ginnie Mae and GSE issuer/servicers, it means meeting advance obligations.
For IMB FHA and Fannie/Freddie loan originators, it means being on the hook financially for faulty underwriting on loans, through indemnification or re-purchases. For IMB FHA lenders, it means heightened scrutiny through requirements like Quality Control (QC) plans, PETR individualized loan reviews, and Credit Watch, which measures default rates.
So, what about the current downturn in mortgage volume for IMBs? Could this be another 2008? In 2008, Wall Street Banks gorged themselves on now-prohibited toxic mortgage assets that collapsed, destroying their financial health, harming consumers and cratering the economy.
IMBs generally steered clear of these mortgages, and then stepped in after 2008 to pick up the slack from many banks exiting the mortgage business. Moreover, because of the IMB business model of securitizing or selling off loans they originate to aggregators, IMBs don’t have significant assets that could collapse in value and bring them down
Yes, some IMBs will go out of business, and some will merge. But the majority of them will survive. Most IMBs simply have to reduce their expenses to right-size them with their reduced revenues. Painful, yes, but no real risk to taxpayers. And no systemic risk, except for the very largest IMB servicers.
The CHLA report also rebutted the “IMBs are unregulated” myth by listing the raft of consumer regulations that apply to IMBs. In fact, IMBs are subject to significantly greater consumer protections than banks are!
All IMBs, no matter how small, are subject to CFPB supervision; in contrast, 98% of banks are exempt from it. All loan originators (LOs) at IMBs must pass a SAFE Act test, an independent background check, 20 hours of pre-licensing courses, and eight hours of continuing education courses. Annually. LOs at banks are exempt from all these basic qualifications requirements. Thousands of registered bank LOs have even failed the SAFE Act test.
Finally, since IMBs predominately originate federal mortgage program loans like FHA and Fannie/Freddie, they are subject to rigorous requirements to carry out loss mitigation to help keep defaulted borrowers in their home. Bank portfolio loans (and PLS loans) have no such requirements, and the banks’ performance during the 2008 housing crisis was abysmal.
Still, why go to all this trouble just to expose what might seem like harmless myths? The answer is these myths feed pressure for more regulation of IMBs — and unnecessary IMB regulatory creep extracts a significant burden, particularly on smaller IMBs.
Smaller IMBs lack the loan volume economies of scale to absorb the compliance burdens of analyzing and complying with the proliferation of regulations being imposed on IMBs. Many small closely held IMB owners are reassessing whether they want to take on the growing compliance costs and liability risks and are increasingly opting to sell their firm.
If IMB critics succeed in convincing federal policy makers to add more unnecessary financial and regulatory burdens, this would exacerbate other factors already driving smaller IMBs out of business or causing them to sell to larger mortgage lenders.
This consolidation would hurt consumers. Reduced competition means fewer consumer choices and higher mortgage rates and fees. Therefore, small business streamlining is critical: Regulations and compliance burdens should be streamlined for smaller IMBs, in the same way they are for smaller banks.
IMB lenders like Atlantic Bay Mortgage Group are the reason why mortgage markets have never been more competitive. But this depends on a broad market of IMB loan originators and securitizers.
False myths have consequences. Everyone who cares about making sure our mortgage markets work for all Americans should read this report carefully and judge for themselves.
Christina Brown is the Chief Operations Officer for Atlantic Bay Mortgage Group, an IMB based out of Virginia Beach, Virginia, and a CHLA member.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Christina Brown at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]