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Non-Bank Lender CEO on Why Companies Like His Could Cause Next Crisis

April 14, 2019
by admin

In an opinion piece published by MarketWatch, the president of the nation’s third largest non-bank lender says institutions such as his could find themselves in a tough situation should liquidity dry up. So tough, in fact, it could endanger the entire financial system.

Sanjiv Das, CEO of Caliber Home Loans, says rising home prices which have made owning a home less affordable has also made life difficult for mortgage lenders. Originations have fallen, and after lenders reduce costs then “they are faced with the decision of whether to lower margins or credit standards.

A “race to the bottom” such as occurred before the housing crisis isn’t the only danger Das sees. Another is liquidity risk, the inability of a firm to meet short-term financial obligations such as a payroll. This risk is particularly acute in the housing sector because non-bank lenders originate more than 50 percent of home loans compared to 9 percent in 2009 and account for 45 percent of servicing.

Non-banks filled those voids after several large banks cut back their mortgage practices post-housing crisis, however the two are interdependent. Typically, big banks provide lines of credit to non-bank lenders so they can originate and service mortgages. Unlike banks, non-banks don’t have a captive deposit base, instead, they originate loans and sell them to entities such as the GSEs Fannie Mae and Freddie Mac. In turn they receive an ongoing fee to service the loan. These mortgage servicing rights (MSR) are an asset that can be used as collateral against which banks provide working capital.

However, MSRs are extremely interest rate sensitive, and if rates fall, smaller and more thinly capitalized non-banks lenders may find it difficult to obtain the funds needed to service loans. In addition, non-banks hedge the value of mortgages on their books to guard against moves in rates. This requires them to post collateral with counterparties. If the value of this collateral drops, it means any underperforming non-banks will have problems getting financing as well. Some banks are already facing problems; 40 percent of them didn’t turn a profit in 2018.

Das says well-run non-banks should perform an analysis of their liquidity situations and identify risk factors. They should also shore up capital in anticipation of a market event. But what is most concerning is an external event that could raise liquidity risk. The threat of “Grexit,” the potential that Greece could leave the European Union, rattled the markets several times, most recently in 2016 [sic]* when 10-year U.S. Treasury note yields fell to 1 percent [sic] 1.321% on July 7, 2016

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