When widespread forbearance was introduced last year, concerns were raised that it would impose strains on nonbank servicers. That is because when a borrower does not make a mortgage payment, the servicer is required to make the payment on the borrower's behalf. Servicers are eventually reimbursed for these advances, but they are required to finance the unpaid amounts. And unlike banks, nonbanks cannot turn to the Federal Reserve System or the Federal Home Loan Banks when they need liquidity.
As it turned out, nonbank mortgage servicers had cash to meet their operational needs. Mortgage refinancing surged because of the drop in long-term interest rates, and nonbank servicers used the proceeds from these refinacings to fund the advances associated with forbearance.
However, if home prices had fallen, instead of rising so sharply, many borrowers might have faced obstacles to refinancing because their homes had fallen in value, and so nonbank servicers would not have had revenue from refinancing to put toward paying advances. Some nonbank servicers might obtain funds by borrowing against their mortgage servicing rights (MSRs). MSRs are a significant asset for nonbanks. In total, nonbanks hold about four times as much in MSRs as they do in cash.9 But MSRs decline in value when home prices fall, and so this borrowing might also have been less available as a funding source in those circumstances.
The Financial Stability Oversight Council raised concerns about the financial resilience of nonbank mortgage companies in its 2020 annual report and recommended that state and federal regulators coordinate closely to collect data, identify risks, and strengthen oversight of nonbank mortgage companies.10 I think this is appropriate. The ideal mortgage finance system must have a place for institutions of many different types and sizes—both bank and nonbank—that are able to serve the varying needs of different customers. For this system to be sustainable, though, I think like activities should be treated in a like manner, and I am concerned about some of the differences in the prudential oversight of banks and nonbanks in the mortgage market.
To return to my theme at the beginning: These are interesting times for housing and mortgage markets. And in such times, I think we can all agree that it's wise to closely monitor developments and be prepared for whatever the future may bring. Fortunately, that is exactly what Women in Housing and Finance is all about. So I would encourage all of us—including the tremendous talent assembled here today—to continue thinking hard about how we can continue to build a resilient and dynamic housing market that meets the needs of the American people.
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