Home Buyers No Longer Look To Banks for Financing
These days, homebuyers are not reliant on “traditional” big-bank lenders for financing. In fact, the biggest mortgage originator in the country, Quicken Loans, actually falls in the “nonbank” category. Quicken surpassed Wells Fargo as the nation’s largest mortgage lender this summer. However, as Quicken founder Dan Gilbert was quick to point out, there are a lot of new faces in the running, making the market extremely fragmented. Quicken’s market share is just over 5.4 percent, meaning, as Gilbert described it, “You know that 19 out of 20 people who wake up this morning and get a home loan aren’t coming here?” His goal, by the way, is 10-20 percent of the market share.
So what is a nonbank anyway, other than just not a “megabank” still suffering from the shock of being villainized during the last housing crisis? Nonbanks are exactly what they sound like: companies that offer consumer financial products and services but do not take deposits. Essentially, nonbank lenders are just that: lenders. They will not also manage your checking account, necessarily, or help you earn extremely minimal interest in a savings account or C.D.
The nice thing about nonbank lenders is that they are able to focus on specialized types of lending. For example, a nonbank lender might specialize in making loans to real estate investors or first-time homebuyers or buyers interested in purchasing unusual types of properties. As long as the nonbank adheres to certain lending guidelines established and periodically adjusted by the federal government, that entity can lend as it chooses.
Not surprisingly, some people are concerned that nonbanks will overextend themselves as the housing market shifts and, some predict, corrects over the next 12-24 months. Ed Pinto, co-director of the Center on Housing Markets and Finance at the American Enterprise Institute, observed, “As long as the good times roll, it’s fine.” He added, “You cannot keep going up like this forever.”
Pinto’s concern hinges largely around the fact that just over half of all mortgage originations in the U.S. today come from nonbank lenders, compared to fewer than one in 10 in 2009. Six of the top 10 lenders in the United States today are nonbanks, and some industry leaders fear that these entities are getting carried away when it comes to selling mortgages. For example, nonbank Freedom Mortgage recently made headlines not just for originating $51.1 billion in home loans in 2017, but for recognizing its employees aggressively based on their sales volumes.
Are you concerned about nonbank lending and its effects on the housing market? What will happen if the market shifts?