Remember when you'd go to a bank or credit union to sign mortgage papers? While this may still be the first lending method that enters future homeowners' minds, non-bank lenders issued more than half the mortgage dollars extended to borrowers in the third quarter of 2016—the first time in more than three decades that traditional lending institutions fell below the 50% mark, the Wall Street Journal reports. Now solidly on the map: independent firms willing to take on risky loans banks won't touch (e.g., borrowers with low credit scores). Inside Mortgage Finance looked at the top 50 mortgage lenders and found non-banks accounted for 51.4% of loan funds in the third quarter—in 2009, these nontraditional alternatives only doled out 9%. And some analysts are worried, noting if the economy goes south, non-banks may find it hard to stay afloat without the deposits that banks count on.
"If defaults start to go up, they will literally run out of balance sheets," a Kroll Bond Rating Agency director tells the Journal. And Stanley Middleman, CEO of Freedom Mortgage Corp., the No. 3 non-bank lender, concedes "our ability to borrow could become impaired" if the economy tanks. But he also says things look good right now with low unemployment and rising property values, and Quicken's chief economist points to having government backup. "As long as there is a government guarantee, that is a powerful leveling factor that keeps the flow of funds going," he says. Investopedia notes that may be comforting for each individual lender—but could pose a "systemic risk to the greater financial system" if these lenders keep their hold on a large part of the mortgage network. (A New Yorker writer takes issue with the government pushing homeownership.)
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