Here's How Regulators Are Inadvertently Laying The Groundwork For The Next Housing Crisis

Only a few weeks ago, we pointed out a remarkable development in the US mortgage market that has significant implications not only for mortgage borrowers, but perhaps the broader economy as a whole: Wells Fargo, formerly America's foremost mortgage lender, had seen its share of the market eclipsed by Quicken Loans - the Detroit-based, nonbank lending behemoth that pioneered applying for mortgages on the Internet with its now-famous Rocket Mortgage (readers will remember RM's celebrity-packed SuperBowl spot).

Many factors (aside from Wells' own criminality, which recently drew a strong, but ultimately meaningless, rebuke from the Fed) have contributed to this shift, as Bloomberg points out.

But as it turns out, the rising dominance of nonbank lenders like Quicken could portend a massive, bad-debt fueled binge reminiscent of the circumstances that led up to the housing crisis. That is to say, a wave of bad debt could create a cascading wave of defaults with repercussions far beyond the housing market.

Considering all the restrictions that Dodd-Frank and other post-crisis regulations slapped on mortgage lenders, one might wonder how this might be possible.


Of course, as Bloomberg explains, instead of making the market safer, regulators are inadvertently enabling the rise of lenders like Quicken who aren't bound by many of the rules that restrict banks' mortgage-lending practices. As a result, Quicken Loans is effectively free from many of the regulations that have forced some of the biggest mortgage lenders into a period of retrenchment...

Make no mistake, regulators have done plenty to rein in the mortgage business since the 2000s. New rules require that lenders carefully assess borrowers’ ability to pay, and that mortgage servicers -- which process payments and manage other relations with borrowers -- give troubled customers plenty of opportunity to renegotiate their debts before resorting to foreclosure. The Federal Reserve performs regular stress tests to ensure that banks have enough capital to weather defaults.

Problem is, the requirements have weighed most heavily on traditional, deposit-taking banks. The added hand-holding required in mortgage servicing, for example, has roughly quadrupled the cost of handling delinquent loans, turning them into major loss-makers. Together with stringent capital requirements, this has all but guaranteed that banks will lend only to people with the most pristine credit. In some cases, they have given up the business entirely: Late last year, Capital One announced it was exiting mortgage origination because it was “structurally disadvantaged."

Because they're not FDIC-backed, the shadow (aka "nonbank") mortgage lenders have much more latitude to approve mortgages to borrowers with lower credit scores. This is a huge advantage in a market where supply is limited, which has helped squeeze home prices to their highest levels on record - surpassing even the pre-crisis peak from June 2006.

As we've pointed out many times  (but most recently last month), with home prices in 80% of US cities growing twice as fast as wages, American working- and middle-class families are finding it increasingly difficult to support their families - let alone afford a home.


Just the other day, we highlighted the cognitive dissonance between data showing US household debt of about $13.15 trillion, of which nearly $1 trillion is the credit card debt alone. Households, it seems, are truly on a dangerous debt binge. Yet, as the economists keep telling us, the US economy has almost never been in better shape...

...Of course, the reality is that the economy looks just peachy if you're a wealthy individual who owns lots of financial securities...


...This has accounted for the bulk of assets gained during the recovery, as the hart above illustrates...

Meanwhile, nonbank lenders are happily courting these already debt-burdened borrowers by signing the up for mortgages with higher interest rates, even though many banks - who will now only deal with borrowers with the most pristine records - won't touch these customers. This has caused the average FICO score for loan originations at these lenders to fall precipitously, as Bloomberg adds.

The non-banks’ growth has been breathtaking. At the end of 2016, such unaffiliated mortgage companies accounted for more than 40 percent of new conventional mortgages (those eligible for sale to government-controlled guarantors Fannie Mae and Freddie Mac), twice the share they accounted for just eight years earlier. They’re also responsible for a decline in credit standards: The average FICO score at origination stood at 730 at the end of 2017, down from 750 five years earlier. For loans guaranteed by the Federal Housing Administration -- an area where the non-banks’ share is greatest -- the average FICO score has fallen to 680.

And the shift has been even more extreme among companies that provide mortgage-servicing...

The shift has been even more extreme in mortgage servicing. Non-banks now service about 51 percent of all loans packaged into new Freddie Mac securities, according to mortgage analytics firm Recursion Co. That’s more than double the share of just five years ago. For securitized FHA loans, the share stands at a staggering 83 percent. Again, banks are leaving the business: Last year, CitiMortgage announced it would exit by the end of this year, transferring the servicing rights for about 780,000 mortgages.

Quicken Loans and its ilk might argue that their gains are a result of their cutting-edge technology (offering mortgages over the Internet?, the banks say. Why didn't we think of that!). But this simply isn't true.

What accounts for the non-banks’ appetite? They might argue that their processes and technologies give them greater confidence in their underwriting. But one can’t ignore the reality that, thanks to relative lax regulation, they also have less at stake. By operating with less capital, they can reap very large returns in good times. In bad times, however, they might not have the capacity to withstand losses or deal with the servicing burden created by widespread delinquencies. As a result, a large swathe of the country’s lending and servicing system could implode when the next crisis hits.

The only sensible solution, Bloomberg posits, would be to level the playing field by adopting additional regulations specifically aimed at these non-bank lenders. But this, too, would come with risks that could potentially harm consumers...

The only solution is to level the regulatory playing field between the banks and the non-banks. This means raising capital requirements for the latter, and subjecting them to stress tests. Difficult as this might sound, the Dodd-Frank financial reform legislation actually created an institution tailor-made to handle such systemic issues: the Financial Stability Oversight Council. The council should put non-bank mortgage lenders at the top of its agenda this year.

Of course, given what looks like a market peak, this might not be such a bad thing...

* * *

Another factor enabling this expansion is the continued dominance of Fannie Mae and Freddie Mac. All together, Fannie and Freddie guarantee some $4 trillion in residential mortgages, accounting for some 40% of the US market. And as we pointed out late last year, the hope that the two mortgage giants - which were nationalized during the crisis following a $187 billion taxpayer bailout - could be wound down under federal oversight has all but vanished.

Today, Senators on both sides of the aisle have concluded that they are too big and too risky to replace. Proposed legislation in 2018 will see them maintain their position as the beating heart of the US mortgage industry, rather than replacing them, like the Senate tried and failed to do four years ago.

Once again, government regulations - that were intended to protect consumers - are instead creating the unintended consequence of making consumers increasingly vulnerable to the same types of predatory lending practices the regulations were initially designed to stamp out.

Make sense?

We didn't think so...


gadzooks Arnold Sat, 02/24/2018 - 20:39 Permalink

Its not regulation,its Goverment Maximization of Prospectus on a massively widened scale, leaning badly on everything

to justify emissions. Purchases foreign and domestic will recede, Price range is price range no matter what the motives are or what the interest rate is. the global honeymoon is already almost over because its paved by nothing else than goverment. that will have to change.... if we can....

In reply to by Arnold

PT gadzooks Sun, 02/25/2018 - 00:53 Permalink

They need to ditch all the bail-out regulations.  No bail-outs.

They need one regulation:  Do not lend money to people who can not afford to repay.
And at this point everyone gets together and pretends they can not write a household budget in any shape or form what-so-ever.

Now, in an ideal world, such a regulation would sit on the books for years and never be needed because the banks would be way ahead of this mark in order to turn a profit and stay in business.  But that doesn't happen in the real world.  Because then too many people would be forced to rely on income streams instead of Capital Gains, aka they would have to provide goods and services to the population instead of relying on extortionate wealth extraction through monopolies and scarcity.

Besides, if businesses were required to acknowledge the true value of their assets then they would be forced to admit they are underwater.

In reply to by gadzooks

Let it Go Sat, 02/24/2018 - 18:52 Permalink

My frustration with America's housing policy boiled over when I read a piece about how roughly 80% of new apartment construction was for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of tenants that are irresponsible.

Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector. The following piece argues the best way to address or level the playing field would be to move away from public housing and give those needing housing aid "rent only vouchers" that could be used with any landlord rather than putting these people into a quasi-government ran project.

 http://Housing Policy Feeds And Hides Growing Problems.html

HRH of Aquitaine 2.0 Let it Go Sat, 02/24/2018 - 18:57 Permalink

Yes but that would mean those government workers wouldn't have any work. FYI I don't view that as a problem, fuck those bureaucrats, I hope they starve.

55,000 homeless in LA. They can't fill out forms. They are druggies, mentally ill, and alcoholics. They don't vote, they are broke, and no one cares. There is no coalition for old white people in the USSA. People care more about stray dogs than they do stray people.

In reply to by Let it Go

Jack's Raging … HRH of Aquitaine 2.0 Sat, 02/24/2018 - 22:58 Permalink

Consider Portland, OR. They don't let people develop. They don't let people buy land. Land is literally, everywhere, but nobody can own nor build. With the supply so artificially constrained, prices have exploded. The only cost effective type of development are luxury high-rise condos.

Portland now seeks to put a tax on luxury & high rise development, so that money can be used to "fight the housing crisis". In doing so, they now make development at a minimum, 1% more expensive. It's a positive feedback loop that perpetuates the problem.

In reply to by HRH of Aquitaine 2.0

GunnerySgtHartman Let it Go Sat, 02/24/2018 - 20:07 Permalink

Another part of the problem is local governments and their building codes, which have been bought and paid for by the building contractors.

My brother wanted to buy a lot and put a modular house on it, including a full basement and garage.  The city flatly told him NO.  He asked why not, and he was told that no modulars or mobile homes were allowed in the city limits.

He demonstrated to the code officer that the modular he wanted was built to the same codes as stick-built houses, and the exterior of the modular would blend in with the neighborhood where the house would be located.  The code officer told him NO and added that it HAD to be stick-built by a contractor - no exceptions.  So he told the realtor that the deal was off.  The city lost property taxes from a house that would be on an otherwise empty, unimproved lot.

The modular he wanted would have been substantially less expensive to buy and set up than a conventional stick-built house, which is why the contractors block those homes at every turn ... then those very same contractors claim they can't build affordable middle-class housing because they can't make money on it.  The simple fact is that they don't want to have to compete.

In reply to by Let it Go

PT Let it Go Sun, 02/25/2018 - 00:59 Permalink

They can afford to build them but no-one can afford to buy them.  This is not supposed to be possible in a "Capitalist country" - yeah, I know -  "Capitalism" is just the old label on the door.  They changed management years ago.

Well, reality shows that they can indeed afford to build them because they actually did build them.  Now we just need to modify reality to a form where people can actually afford to buy them... and without all the bullshit accounting tricks involving Ponzi borrowing or Govt "partnerships".

Your land has been stolen from you.  Everything else is just playing with words.

In reply to by Let it Go

Endgame Napoleon Let it Go Sun, 02/25/2018 - 11:58 Permalink

Please, government housing programs do no such thing. As with all other government programs, the assistance is almost entirely based on the number of birth-canal exits in a single-earner household. For the mixed-income units, which are located in nicer areas of cities than most single, childless college grads can afford, moms with access to other forms of welfare, like free groceries and refundable child tax credits up to $6,444, likewise get a rent reduction per child produced, as the builder got a per-unit tax credit from government to build housing to accommodate single motherhood. The parking lots in those complexes are full of new SUVs, because on top of their multiple sources of unearned income from government and their wages from part-time jobs that keep them below the earned-income limit for welfare programs, those moms have lots of help with luxuries from the children’s grandparents and often untraceable money from boyfriends. Then you have the Section 8 Housing, located in dangerous areas of cities, that is either free or nearly free, like $35 per month. This goes to the single moms with access to even more government assistance, including monthly cash assistance. 

The ability to sustain a mortgage over time is linked to marriage, a trashed institution, and people were far more able to pay off mortgages by retirement in the era of single-earner, married households with stay-at-home moms. Now, all the women are in the workforce, with most childbearing-age women sporting unearned income streams from spouses, child support or welfare and child-tax-credit welfare. Due to unearned income for womb productivity, they are able to work part time for less pay, diluting wages for the breadwinners living on earned-only income—the breadwinners of all kinds, not just those with kids. Wages will never go up significantly in this situation. The housing market will never really revive. Home builders are catering only to the market of dual-high-earner parents in the top 20%, another group that helped tank the American middle class by concentrating two of the few good-paying jobs under one roof, halving the size of the middle class. There is a lot of divorce, even among that much less economically stressed group, and since everything is now based on two earners, when those on the lower rungs of the top 20% get divorced, they often can no longer their keeping-up-with-the-Jones’ palace. 

In reply to by Let it Go

man from glad Sat, 02/24/2018 - 18:56 Permalink

I don’t understand how this works. Where does Quicken get its capital from? Do they repackage the mortgages and sell them to banks? How can they have got so big if they don’t have access to fraction reserve lending Ponzi scheme?

HRH of Aquitaine 2.0 man from glad Sat, 02/24/2018 - 19:14 Permalink

I have refi'd my mortgage several times. Each time it was sold in less than 30 days. My current servicer is Pennie Mac. Another variation on a theme. With a 30-year fixed at 2.875 I am not complaining.

Stay the fuck away from Sun West! They offshore their accounting and back-room stuff to India. Scary.

There is no time limit on how long before you refi. If I was getting a new loan I would apply to refi within a few months to a lower rate. You don't get the best rate from loan originators. I have been able to negotiate much better rates, including loan costs, during a refi. I don't think most people realize this process is open to them. You have to be willing to do your research and negotiate and crunch the numbers. My last two refi's I did via the phone, email, and my scanner. Went to a local title / escrow office for the loan/note signing.

In reply to by man from glad

GunnerySgtHartman HRH of Aquitaine 2.0 Sat, 02/24/2018 - 19:49 Permalink

I refinanced my house twice.  The second time, I made a point of finding a lender that would not resell the loan; I didn't want some POS company with customer service in Third-World-Country-Halfway-Around-The-World taking care of it.  One of my first questions to a local credit union was whether or not they'd keep it or sell it.  They said they would, and they have been true to that commitment.

The last payment is only a few months away.

In reply to by HRH of Aquitaine 2.0

HRH of Aquitaine 2.0 GunnerySgtHartman Sat, 02/24/2018 - 20:30 Permalink

I am a veteran so there are some excellent terms to refi if you qualify. No, I haven't done this to get cash only to reduce my interest rate.

I agree, you can ask to see who is going to get or service your loan. Going with Sun West was a major error. I am happy I only had them for one year and was able to refi for a lower rate and the servicer is PennyMac. So far I have nothing bad to say about PennyMac.

In reply to by GunnerySgtHartman

Life of Illusion GunnerySgtHartman Sat, 02/24/2018 - 22:27 Permalink



Pennymac same gang from countrywide mess

Mr. Kurland served as a director and, from 1979 to 2006, held several executive positions, including President, Chief Financial Officer and Chief Operating Officer, at Countrywide Financial Corporation

also they sell (flip) MBS...

Agency-eligible mortgage loans meeting the guidelines of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) on a servicing-retained basis whereby it retains the related MSRs; government mortgage loans (insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA)), which it sells to PLS, a Government National Mortgage Association (Ginnie Mae) approved issuer and servicer, and jumbo mortgage loans, which generally on a servicing-retained basis, it securitizes or sells to third parties


and supplier of all this mess as it continues on and on..



In reply to by GunnerySgtHartman

A Sentinel Åristotle Sat, 02/24/2018 - 22:01 Permalink

I doubt that they could get away with mbs where they just say “trust our cooking” and give no details about underlying assets or performance.

In that way this phenomenon could be good- their mortgage products are probably better than Fannie’s and Freddie’s — Congress won’t kill the mortgage beast, maybe the quickening will.

In reply to by Åristotle

SHADEWELL man from glad Sun, 02/25/2018 - 00:39 Permalink

Quicken undertakes short term financing from Warehouse lenders to initially fund the loans that they originate. 

These loans are then "sold" to intermediary "bankruptcy remote" entities, with the final entity occupying the role of the "Depositor", who usually sells all of its right title and interest in ant to "the mortgage loans" to a Trustee on behalf of either a new York common law or Delaware statutory trust, for the benefit of the rust's certificate (bond) holders. It basically represents a sale of an account receivable (mortgage loan payments)


It gets better, the trust hires an underwriter to market the "Certificates" (bonds) to institutional investors who make purchases of these certificates (mortgage backed securities "MBS"), where these sales "overfund the offering" (the pool of loans on the individual deal for a specific trust). These sales filter back to the "originator" (Quicken), who then pays off its warehouse lender and also makes a profit.  Beter yet, Quicken has eliminated any default risk associated with any of these loans, because they are no longer an "owed asset", as they are now part of a trusts corpus assets

Wait, it gets even better. These trusts have governing documents, primarily a pooling  and servicing agreement (PSA, or SEC 8k), which many times dictates that the originator (Quicken) retains the right to "service" the mortgage loans on behalf of the new owner trust.  the mortgage servicer is responsible for maintaining the billing process as well as the foreclosure process (many times thrugh a default or sub servicer)  Wait it gets even better, the mortgage servicer generally receives 2.5% of the payment stream from the pool of loans (5000 or so) and can have no stake in the game

Or Quicken purchases servcing rights from others such as here from GMAC/Ally…


some examples of PSA's…

Wait it gets better, you the stooge borrower are never informed of any of the preceding, so when you get your mortgage bill from Quicken the mortgage servicer (no longer wearing its ownership hat), you believe that Quicken still "owns" your loan, it doesn't. Worse, the media (plants) continue to deceptively refer to entities such as Quicken as "lenders" regarding loans that have been sol long ago where Quicken in now only a "servicer"

Heres case law where one crook sues another regarding these clandestine transactions which litigation is far different than where a borrower gets steamrolled into submission..

Its a very sad story that I have personally been intimately involved with 

it saddens me deeply that it is all gearing up again


The book will  be coming



In reply to by man from glad

MK ULTRA Alpha SHADEWELL Sun, 02/25/2018 - 02:33 Permalink

Too many lost their house because of this. It was bad. Some people who made the correct payments had their homes taken, some who tried to pay up got their homes taken. In many cases, no one could find out who held the mortgage papers, so who owned it couldn't be determined, a great deal of equity was stolen.

It's something about taking people's houses, in the S&L crash in which the Jews robbed the S&Ls, (sold the S&L bonds which weren't real, just like the mortgage backed securities of the 2008-9 financial meltdown theft), then all the houses S&L accumulated and then lost from bankruptcy, was handed to operators to sell again, then the next big Jew directed rolling of the economy was the Jew inspired and ran financial meltdown and the TARP bank robbery. (and before that was the tech crash hyper rumor crash which funneled mom and pop middle class baby boomer money into the hands of a new power financial class, the Jew controlled Hedge Funds.

Another bad issue was the IRS during Obama, they went after hundreds of thousands of white people, mostly in fly over and took their property, at the same time EPA was fining them for things like too much dust when they would plow. This was the Obama administrations war on farmers and ranchers. We'll never know how many lost their property, but the IRS was shutting down legitimate businesses by confiscating the business' cash in the bank. It was a war on white America under Obama, and each agency did it's part.

The IRS Chief was a Jew, and many in congress wanted to impeach him. But he served his purpose for Obama by preventing conservative groups from operating, Obama railed against conservative talk radio so next the conservative groups would've been more, but Obama shut that down with the crooked IRA that was allowed to go much further destroying white owned businesses, farms and ranches nationwide, so the law was broken, because the Jew went after hundreds of thousands, he and the other agencies drove people off their land.

It was all against white middle class America, it was another great robbery sanctioned and coordinated by the Jew controlled federal government.


In reply to by SHADEWELL

desertboy Sat, 02/24/2018 - 18:59 Permalink

1.5 trillion of debt in the fracking industry, based on hypotheticated value.  Who needs the housing sector for a crisis this time around?

A Sentinel desertboy Sat, 02/24/2018 - 22:07 Permalink

I’ve seen midsized banks hfi (held for investment) mortgage portfolios that are much bigger than 1.5 T. The megas are nice, low-risk performers. Helocs give you behavior signs. There are almost no 10% down 30 year fixed loans. The hybrid stuff — convertible io’s, variables with cash out, the lowdoc sort of thing- those are intrinsically more risky.

In reply to by desertboy

dchang0 Sat, 02/24/2018 - 19:09 Permalink

Re: "... it was exiting mortgage origination because it was “structurally disadvantaged.""

Isn't this the point of Big Gov't? On behalf of the workers, over-regulate private businesses for being too greedy and evil until they quit because the profit motive has been negated, then Big Gov't can provide everything to the people as state-run or state-owned enterprises. When even the workers don't want to work because their individual profit motives have been negated, use labor camps and firing squads to force them to work.

1.21 jigawatts Sat, 02/24/2018 - 19:15 Permalink

No worries, if all else fails

Mnuchin can pull a Paulson move, hold a gun to congress's heads

and say "We need 780 quadrillion dollars or the economy crashes."

They got this covered.  Am I right, Kikes?

crossroaddemon Sat, 02/24/2018 - 19:23 Permalink

A housing crash would be a good thing. Real estate is, at the very least, 50% overvalued. Which is why after I retired from touring I fucked off to a little flyover town where housing is cheap. I'm surprised more people don't do that.

karenm Sat, 02/24/2018 - 20:12 Permalink

"creating the unintended consequence...:


No, it's intended. They aren't stupid, they're evil. The media uses this tactic endlessly and people keep buying it, thinking they know more than big banks or corporations about their own business.


No, you don't. They know what they're doing, and why do you assume they don't want to cause millions to go bankrupt? because it's bad for their business? 


Really? Collecting billions in assets(houses)at pennies on the dollar thru foreclosure is "bad"?


You haven't thought this through if you believe that.