It's been a decade since the US housing bust and now academics in California say there's a new rising risk to the mortgage industry
It’s been a decade since the US housing bust and now academics in California say there’s a new rising risk to the mortgage industry.
Two professors at Berkeley Haas School of Business at University of California are warning that, while the overall industry has tighter regulations now, a boom in nonbank lenders since the crisis could mean a mortgage industry meltdown that could endanger the economy.
"If these firms go out of business, the mortgage market shuts down, and that has dire implications for the overall health of the economy," says Richard Stanton, professor of finance and Kingsford Capital Management Chair in Business at Haas.
The paper "Liquidity Crises in the Mortgage Market" highlights that many nonbank lenders failed during the housing bust but the sector has been growing since as the result of banks and others pulling back their exposure and tightening underwriting conditions.
The report says that nonbank lenders in 2016 accounted for half of all mortgages, up from a 20% share in 2007. It sets the share of FHA and VA backed loans at 75%.
And they point out that many nonbanks have limited capital reserves to draw on in an emergency, relying instead on warehouse lines of credit from larger commercial and investment banks.
Stanton’s co-authors include Nancy Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets and chair of the Haas Real Estate Group. You Suk Kim, Steven M. Laufer, and Karen Pence of the Federal Reserve Board.
They say they want to highlight the risk of the growing nonbank sector, as most discussion around preventing another housing crash has focused on the supervision of banks and other deposit-takers.
"Less thought is being given, in the housing finance reform discussions and elsewhere, to the question of whether it is wise to concentrate so much risk in a sector with such little capacity to bear it," the paper concludes.
