The share of outstanding mortgages guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae has also increased. Together, these shifts mean that exposures to the nonbank mortgage sector have grown significantly.
But nonbank mortgage companies also present unique risks. The report finds that their specialized business model means they are especially susceptible to macroeconomic fluctuations in the housing market, such as changes in housing prices, interest rates, and delinquency rates. They are more reliant than depository institutions on the value of mortgage servicing rights, which may lose value in the event of a downturn in the housing market. And they are also vulnerable because they can have high leverage, short-term funding, and operational risks.
These vulnerabilities matter. If a nonbank mortgage company fails, it may be difficult for it to find funding to continue critical servicing operations, such as making required servicing advances or providing adequate loss mitigation for distressed borrowers. Suspending services can in turn harm borrowers and other stakeholders. Even transferring the portfolio of a distressed servicer is a resource-intensive and time-consuming process, and disorderly servicing transfers can cause additional harm to borrowers. And if a new servicer cannot be found, the federal government may be left to assume the servicing obligations itself. All of these outcomes could disrupt economic activity and the provision of financial services.
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