For most households, the family home is their most important asset. A safe and stable mortgage market that provides affordable credit and reliable services to households is critical to our economy. When authorities fail to safeguard this market, the American dream becomes a nightmare.
Regulators' failure to prevent the 2008 mortgage crisis led Congress to create both the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC). Consumer protection and financial stability are complementary objectives. Many years ago, the CFPB established a set of new rules to clean up the worst abuses in the mortgage market. We will soon propose a rule to strengthen certain protections for homeowners. But safeguards for consumers must be accompanied by strong financial stability barriers that ensure the financial system can effectively serve small businesses and households over the long term, especially in times of stress.
Today, FSOC releases a report and recommendations on the financial stability risks posed by nonbank mortgage companies.
In the last 15 years, non-bank entities have significantly increased their participation in the mortgage market. They now originate approximately 65% of all mortgages and service more than 50% of outstanding mortgage balances. The top 10 nonbanks service nearly $5 trillion in mortgages and originate trillions of dollars in mortgages annually.
Regulators are concerned about the fragile nature of these companies. They are not subject to the same federal financial requirements as banks, although they pose similar risks. Mortgage activities are often the only line of business for these companies, leaving them vulnerable to market swings. They also do not have much cash on hand and take out large loans from banks that can withdraw financing at any time.
The CFPB has found that addressing transfers from healthy businesses can be difficult and disruptive, even in the best of times. If one or several large non-bank mortgage companies were to fail during a period of stress, their lights could go out.1 It may take some time to transfer service activities to a new company, if one is available.2 Meanwhile, it would be chaos for consumers. Millions of borrowers may have trouble transmitting their payments and may not have anyone in customer service to contact if they have problems. Distressed borrowers may not be able to access or continue loss mitigation plans, which could lead to a wave of avoidable foreclosures. Nonbank failures could also reduce access to credit, especially for low- and moderate-income households who disproportionately rely on nonbank mortgage companies.3
While state and federal agencies have made some progress on this issue, the report recommends that Congress act to improve the resilience of individual businesses and the sector as a whole. The report also recognizes that extending any public privileges to non-bank entities should be accompanied by direct improvements to existing protections for distressed homeowners.
The report is silent on what tools, if any, FSOC itself should use to address these risks. That must be the next phase of our work. Consistent with the 2023 Analytical Framework and Nonbank Company Designation Guidance, we must carefully consider whether any large nonbank mortgage companies meet the legal threshold for increased oversight and regulation by the Federal Reserve Board. .
The CFPB will do its part to improve the functioning of this market. We will pursue rulemaking to strengthen our foreclosure protections for borrowers. Existing rules leave too many borrowers exposed to foreclosures and junk fees as they struggle to comply with seemingly endless paperwork requirements. The proposed rule we are considering would shift the focus of a compliance exercise from checking the boxes to getting distressed homeowners to quickly mitigate their losses.
Under the proposal, foreclosure protections would begin from the moment a borrower first asks for help, even if the servicer does not yet have all the documents. These changes, if ultimately realized, would allow servicers greater flexibility to help mortgage borrowers struggling to make their payments in a variety of circumstances.
The CFPB and FSOC must remain vigilant against the same risks that prompted the creation of our agencies in the first place.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information visit www.consumerfinance.gov.
