Non bank mortgage companies (NMBs) specialise in offering financing options to purchase property. This type of firm may be independent, national, or online, and they do not fall under federal regulation as banks do.
After the 2008 financial crisis, traditional lenders stepped back from mortgage lending, leaving non-bank lenders an opening to gain market share.
They don’t hold deposits.
Non-bank mortgage companies operate without deposit accounts, relying instead on wholesale funding to fund property loans. Since the global financial crisis, customers have increasingly turned towards these smaller lenders as an alternative source of loans.
Following the financial crisis, traditional mortgage lenders were required to adhere to tighter regulations. Many either exited the business altogether or reduced their market share significantly – leaving a massive void that non-bank mortgage companies such as Rocket Mortgage and United Wholesale Mortgage quickly filled.
Nonbank lenders frequently sell their loans to Fannie Mae and Freddie Mac, two huge government-sponsored enterprises at the centre of American housing finance. Nonbank lenders may retain service rights on your loan so they can collect payments while earning a profit over time from them. They typically employ warehouse lenders who offer short-term credit lines as a safeguard against reputational and regulatory risk for them.
They don’t have to follow the same rules as banks.
After the financial crisis, traditional banks largely withdrew from the mortgage market, leaving nonbank mortgage companies such as Quicken Loans, LoanDepot, Lakeview and PennyMac Financial as lenders to fill this void. Nonbank lenders such as these provide loans for those who might otherwise not qualify through banks, such as low-income consumers with minority backgrounds and those who may have limited or no credit. They provide these services through Quicken Loans, LoanDepot Lakeview PennyMac Financial.
Non bank mortgage companies do not need to abide by the same strict regulations as banks; nonetheless, they still must abide by rigorous legal and industry codes; in particular, consumer credit laws and privacy legislation may apply.
Government-backed mortgage loan providers must also fulfil strict eligibility criteria to gain approval, such as providing flexible credit terms to high-risk borrowers or accepting servicing advances and transfers according to GNMA, FHFA/GSE and CSBS regulations; in addition, they must repurchase or replace defaulted mortgages under CRA guidelines if their losses cannot be covered by private parties such as warehouse lenders and counterparty entities.
They’re more flexible with credit.
Nonbank lenders provide access to an array of mortgage products at highly competitive rates and flexible loan terms, making them an excellent choice for first-home buyers who don’t meet banks’ lending criteria and investors looking to grow their property portfolios.
As these lenders are smaller in scale, they can afford to invest more in customer service – something most borrowers value highly, especially those who have experienced poor service from larger banks. Therefore, non-bank lenders tend to be more accommodating when it comes to credit scores, debt-to-income ratios and other criteria than larger banks do.
They’re smaller in size.
After the 2008 financial crisis, traditional lenders either reduced or withdrew from mortgage lending altogether, creating a vacuum that non-bank mortgage lenders filled. Being smaller companies without brand recognition affords these lenders a lower cost of funds and allows for better interest rates on mortgages.
Non bank mortgage specialises in serving those borrowers who would be turned down by traditional banks, such as those with lower credit scores or those who want to purchase homes that require extensive renovations. Indeed, more FHA or VA-backed mortgages come from nonbank lenders such as Quicken Loans and LoanDepot than from banks.
The credit facilities of nonbank mortgage companies are typically secured by warehouse lenders, the same financial institutions that fund or buy individual or pools of mortgage loans packaged into an asset-backed security such as a residential mortgage-backed security (RMBS). These facilities must be renewed on a regular basis and subject to the same risk underwriting criteria as the mortgage company itself. During periods of increased interest rate volatility or economic stress, warehouse lender liquidity can be reduced by the same forces that cause the mortgage servicer’s cash flow to deteriorate.