CHLA/CMLA Response Letter to Moody’s Analytics Economist

Mark Zandi

Chief Economist

Moody’s Analytics

121 North Walnut Street, Suite 500

West Chester, PA 19380-3166


Dear Mark:

We read with some interest your recent Washington Post article: “How the Trump Administration can continue progress in U.S. housing”. We were struck by your comments that:

“Small non-bank lenders are working hard to fill the void left by the banks, but they aren’t up to the task. They don’t have the needed capital. This is constraining FHA lending and increasing risks to taxpayers because the less-well-capitalized non-bank lenders surely will struggle more in the next housing downturn.”

We are writing to rebut each of these claims and to inquire whether you have any data or evidence to back them up. Our purpose in communicating with you is that this is an extremely important issue with significant implications for the memberships of our respective organizations, which are composed of small and mid-size independent lenders, many of which are family or management-owned.

1.   CLAIM: “Small non-bank lenders are working hard to fill the void left by the banks, but they aren’t up to the task.”

In fact, non-bank lenders’ share of the overall mortgage market has increased from 25% to 50% since the 2008 housing crisis hit (with small community lenders playing an important role in this), and the non-bank share of GNMA securitizations of FHA and other government-insured loans has risen from 25% to over 60% in the last few years. As many banks have exited the FHA business or imposed credit overlays on FHA to stop lending to otherwise qualified lower income, lower FICO borrowers, it was non-bank lenders that stepped in to make sure these consumers had access to mortgage loans.

The result: even with the significant bank exodus from FHA, in fiscal year 2016 FHA insured 1.3 million single family loans with a dollar volume of $245.4 billion. These totals represent a 13%increase by number and a 15%increase by dollar volume over the fiscal year 2015 totals.

 Therefore, what evidence do you have that contradicts this empirical data, and is the basis for your claim that non-bank lenders are not “up to the task?”

 2.    CLAIM: “They don’t have the needed capital.”

 As you know, FHA loans are fully insured by the federal government for loss, with over 3% Net Worth in the forward loan program to cover potential losses in the next recession. Moreover, the overwhelming percentage of FHA loans originated by non-banks are not held in portfolio, but instead are done under an origination to sell model, either securitizing them through Ginnie Mae or selling to larger lenders who generally do the same.  Thus, capital is only needed to cover servicing obligations for those who directly securitize – and for all loan originators to cover the short-term cost of originating the loans until they are sold off.

We would note that even during the worst of the 2008 crisis, GNMA remained profitable, as their financial controls and the FHA insurance meant that non-bank lenders were adequately capitalized to meet their obligations. Yes, GNMA is seeking more funding for more staff to ensure it can adequately regulate non­banks as the number of non-bank GNMA issuers has grown. But there is no evidence there is any real concern about the adequacy of non-banks’ capital to   meet their FHA indemnification or GNMA servicing obligations.

With regard to FHA loan origination by non-banks, these lenders finance the FHA insured loans they originate on a short-term basis with lines of credit, commonly referred to as ‘warehouse lines’ from commercial banks. Over the last several years there has been no shortage of availability of warehouse lines for small and mid­sized independent lenders.  There is no evidence this is likely to change.

Therefore, what evidence do you have that contradicts these basic points, and what is the basis for your claim that non-bank lenders “don’t have the needed capital?”

 3.    CLAIM: “This is constraining FHA lending.”

 As noted in point 1 above, statistics show exactly the opposite – that non-banks have significantly increased FHA loan origination at the same time banks have been exiting the program.

So, how can you possibly draw the conclusion that a significant increase in non-bank FHA lending is currently constraining FHA lending?

4.     CLAIM: “This is . . . increasing risks to taxpayers because the less well-capitalized non-bank lenders surely will struggle more in the next housing downturn.”

 We do not even understand the theory behind this claim.  It is true that taxpayers are on the hook for FHA loans.  However, the program works under a model in    which lenders originate loans under FHA standards, FHA has extensive controls in place to monitor their loan origination performance and financial capability (e.g., Credit Watch, extensive.  Quality Control programs, capital requirements) and

GNMA has extensive financial requirements and ongoing oversight to ensure that servicing obligations are met.

We understand that it is important for banks or lenders for that matter, that hold loans in portfolio not insured by FHA, RHS or the GSEs to have sufficient capital to cover losses. However, FHA loans are government-insured. Thus, the only issue where capital comes in to play for non-bank FHA lending is their ability to meet indemnification or False Claims Act claims when the loans are not properly underwritten. Let’s look at the evidence on this point.

First with respect to the billions of dollars of False Claims settlements to date, the great majority have been imposed on banks, not on non-banks. Moreover, none of the senior executives at the banks have had to pay these settlements out of their personal funds. In contrast, the principals and owners of non -ban k lenders have direct personal financial responsibility for FHA indemnification or False Claims penalties. We believe this higher level of accountability creates an important financial incentive to underwrite sound FHA loans.

Secondly, there is no evidence that non-banks are doing a poor job of underwriting FHA loans. In fact, at the same time that non-bank FHA market share has soared, the performance of FHA loans has significantly improved, with loans of recent vintage having early default rates at 10 year lows.

Finally, with respect to taxpayer risk, the future is always speculative – but we would point out that it was the large banks (and not non-bank mortgage lenders) that were bailed out with hundreds of billions of taxpayer TARP funds when the housing crisis hit. These taxpayer funds were necessitated by bad underwriting by these banks and Wall Street Bank securitization of risky subprime loans.

Therefore, in light of all these points, what evidence do you have that non­-bank lenders will “struggle more” in the next downturn and they will “pose a risk to taxpayers?”

 Finally, in closing we were also puzzled by your comments on the GSEs. Your essay claimed that establishing strong capital standards for the GSEs and subjecting them to stricter regulation will somehow subject borrowers to higher mortgage interest rates and less access for underserved borrowers, while mandated risk sharing will avoid those consequences. We are not sure how risk sharing holds mortgage interest rates down, since presumably risk sharing entities would demand a transfer of G Fees at least equal to the value of the risk they are taking   on.   Further, if this is Congressionally mandated, the risk share providers know that the GSEs must engage in this, hardly a situation conducive to achieving the best price possible.

Presumably you have performed some analysis on the impact of risk sharing by the GSEs on the mortgage interest rates paid by borrowers.  We would be interested in that analysis to see if we agree with the conclusions you drew from the analysis.

So to summarize:

 -Please share your specific data that small independent lenders create increased risk to taxpayers and/or the FHA insurance program in the next downturn; and

-Please share your specific data that greatly expanded risk sharing by the GSEs will result in lower interest rates for consumers and a safer secondary mortgage market in the next downturn.

We would be happy to meet with you to discuss these issues and your response to this letter.

 Scott Olson

Executive Director

Community Home Lenders Association


Glen Corso

Executive Director
Community Mortgage Lenders of America




CHLA in the News