Historical evolution of the nonbank mortgage sector

The rise in the nonbank lending sector was facilitated by several developments over the past
50 years.
Development of GSE and Ginnie Mae securitization infrastructure The first major change occurred in the 1970s, when the federal government introduced standardized
securitization systems through the GSEs5 and the Government National Mortgage Association (Ginnie Mae)6 and allowed non-depository mortgage banks to issue and service loans
under GSE and Ginnie Mae authorization criteria (see Follain and Zorn, 1990; Garrett, 1989,
1990; Jacobides, 2005; Kaul and Goodman, 2016).
Separation of mortgage origination from mortgage funding The second major
change, the separation of mortgage origination activity from mortgage funding activity, occurred as the result of the recession of 1979–81, when banks and savings and loan institutions
(S&Ls) laid off their underwriting staff and then re-established long-term relationships, often
with the same staff, as independent loan brokers (see Garrett, 1989, 1990; Jacobides, 2005).
Separation of mortgage servicing from mortgage funding The third major change,
the separation of loan servicing from loan origination, occurred in 1991, when the Resolution
Trust Corporation (RTC), a government-owned asset-management company charged with
liquidating the assets of failed S&Ls, devised new legal structures that enabled the separate
sale of mortgage servicing rights from loan portfolios (see Resolution Trust Corporation,
1992, 1993, 1994). By the end of 1993, the RTC had successfully sold and priced $6.9 billion
in mortgage servicing rights from the portfolios of 32 failed S&Ls (see Resolution Trust
Corporation, 1994), thus launching the stand-alone nonbank mortgage-servicing industry.
Attempts to recover credit losses In the aftermath of the financial crisis, the GSEs
and the U.S. government pursued loan originators in order to recover some of the credit
losses associated with loans collateralizing GSE and Ginnie Mae securities. By 2013, the


GSEs had successfully closed on repurchases, indemnifications, and negotiated settlements
valued in aggregate at $46.12 billion of direct liability costs to mortgage lenders, and a trickle
of other institutions settled in subsequent years (RBS, for example, settled for $5.5B in July
2017).7 Meanwhile, in 2009, the Fraud Enforcement and Recovery Act (FERA) 2009 was
passed8 and the Department of Justice (DOJ) began litigating mortgage fraud cases involving
FHA and VA, often pursuing treble damages through the False Claims Act (1863). As of
October 2016 the cumulative DOJ settlements had reached $6.6 billion of mortgage-related
False Claim Act Violations against regulated commercial banks (see Goodman, 2017).
These legal and regulatory actions appear to have weighed more heavily on banks than
nonbanks. The San Francisco Chronicle noted in 2015, “Banks are also still smarting from
the fines, settlements, and repurchase demands that grew out of the mortgage crisis. It has
been a painful time for lenders, especially big banks, said Bob Walters, chief economist with
Quicken Loans. ‘Independent mortgage companies don’t have the same legacy exposure.’ ”
In addition, the structure of nonbanks may make them less sensitive to such losses. Most
nonbanks are privately held and so face less market-disciplinary pressure than banks in
response to losses. Most mortgage nonbanks are also monolines with fewer business lines to
protect than banks, and so have a more viable option to go out of business in the face of
outsized losses.

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