BERKELEY, Calif.–Mortgage market analysts don’t expect a bubble to burst similar to what happened during the crisis of more than a decade ago, but many are forecasting a string of mortgage companies to file for bankruptcy in the months and year ahead.
The shutdowns are expected as the result of the slowdown in homebuying due to rising rates.
“The nonbanks are poorly capitalized,” Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley, told Bloomberg. “When the mortgage market tanks they are in trouble.”
According to Bloomberg, in 2004, only about a third of the top 20 lenders for refinancings were independent firms. In 2021, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which analyzes the industry for mortgage lenders. Since 2016, banks have seen their share of the market shrink to about a third from about half, according to Inside Mortgage Finance data cited by Bloomberg.
The ’Shadow Lenders’
“Many of the so-called shadow lenders will emerge from this slowdown relatively unscathed. But some lenders have already stopped operating or scaled down dramatically, including and Sprout Mortgage and First Guaranty Mortgage Corp. Both specialized in riskier lending that isn’t eligible for government backing,” Bloomberg said. “First Guaranty, a company that according to court papers is majority owned by fixed-income giant Pacific Investment Management Co., filed for bankruptcy, saying it failed after it made loans earlier this year that dropped in value. It was holding onto those loans until it had enough to bundle into bonds and sell to investors, and it had been temporarily funding them with a line of credit.”
First Guaranty employed 600 people before it filed bankruptcy in June and made $10.6 billion in loans last year, according to court records, the report said.
“Independent lenders gained a toehold in the market because banks pulled back so much after the 2008 financial crisis, which started with excessive lending in mortgages,” Bloomberg stated. “Regulators have often encouraged the retreat, and it’s still happening: Wells Fargo & Co., the biggest Wall Street firm in the US mortgage business, plans to shrink its home loan empire.”
No Emergency Capital
Bloomberg added that unlike banks, independent lenders often don’t have emergency programs they can tap for financing when times get tough, nor do they have stable deposit funding.
“They depend on credit lines that tend to be short-term and depend on mortgage prices,” according to Bloomberg. “So, when they’re stuck with bad assets, they face margin calls and potentially go under.”
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