What is Giving Compass?
We connect donors to learning resources and ways to support community-led solutions. Learn more about us.
Giving Compass' Take:
• Understanding how the mortgage-market crash in the late 2000s happened is crucial for creating regulations that can prevent a similar crisis.
• The role played by liquidity crises in the nonbank mortgage sector is not well understood. How can donors help fill this knowledge gap?
• Work to reduce homelessness in the short-term by working with proven organizations like Homewise.
Most narratives of the housing- and mortgage-market crash in the late 2000s attribute it to house-price declines, weak underwriting, and other factors that caused credit losses in the mortgage system.
In the aftermath of the crisis, regulators implemented a wide array of reforms intended to improve underwriting practices and outlaw toxic mortgages.
Much less understood, and largely absent from the standard narratives, is the role played by liquidity crises in the nonbank mortgage sector. While important post-crisis research did focus on pre-crisis liquidity problems in short-term debt-financing markets, the literature has been largely silent on the liquidity vulnerabilities of the short-term loans that funded nonbank mortgage origination in the pre-crisis period, as well as the liquidity pressures that are typical in mortgage servicing when defaults are high. These vulnerabilities in the mortgage market were also not the focus of regulatory attention in the aftermath of the crisis.
Of particular importance, these liquidity vulnerabilities are still present in 2018, and arguably the potential for liquidity issues associated with mortgage servicing is even greater than pre-financial crisis.
Although the monitoring of nonbanks on the part of the GSEs, Ginnie Mae, and the state regulators has increased substantially over the past few years, the prudential regulatory minimums, available data, and staff resources still seem somewhat lacking relative to the risks. Meanwhile, researchers and analysts without access to regulatory data have almost no way to assess the risks. In addition, although various regulators are engaged in micro-prudential supervision of individual nonbanks, 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, and a history, at least during the financial crisis, of going out of business
What happens if interest rates rise and nonbank revenue drops? What happens if commercial banks or other financial institutions lose their taste for extending credit to nonbanks? What happens if delinquency rates rise and servicers have to advance payments to investors—advances that, in the case of Ginnie Mae pools, the servicer cannot finance, and on which they might take a sizable capital loss? We cannot provide reassuring answers to any of these questions.