By Dan Brown
ABA Data Bank
Mortgage lending provides Americans with the opportunity to purchase homes, build wealth and literally own a piece of the United States. Following the 2008 financial crisis, regulatory changes led to a significant shift in the mortgage origination process, due in part to significant new regulations on lenders. Over the last 15 years, nonbank mortgage companies have become the dominant source of mortgage loans, taking market share from banks. This has led many, including the Federal Housing Finance Administration, to assume incorrectly that banks have moved away from supporting the housing market.
However, while direct mortgage originations are no longer dominated by banks, the interconnectedness between banks and mortgage companies means that banks are just as important as ever to the housing market. Because mortgage companies do not have deposits or access to liquidity facilities, their funding heavily relies on banks. Yet, as housing affordability is at a historic low, proposals in the FHFA review of the Federal Home Loan Banks to limit bank access to advances will make affordability worse. Therefore, in light of these macroeconomic challenges, FHFA should ensure the FHLBs remain a tool that banks can use to support housing affordability.
Post-crisis changes in the industry
Sweeping regulatory changes after 2008 have had a profound effect on the banking industry. As a recent ABA analysis illustrated, regulatory changes led to spillover effects where many bank-like activities moved to the less-regulated private credit market. As such, the private credit market grew significantly during this period, as did bank lending to these nonbank financial institutions. Figure 1 illustrates that bank lending to nonbanks (which include private equity, mortgage companies and others) grew at a much faster pace than direct bank support for the housing market.
The growth in the nonbank sector has directly coincided with the rise of mortgage companies. According to the FDIC, 2016 was the first year that mortgage companies originated more loans than banks. That trend has continued, and depositories’ share of mortgage originations has plummeted from 81 percent to 39 percent over the last 15 years (see figure 2). While much of this evolution can be traced back to regulations enacted after the crisis, several reports have incorrectly interpreted this retreat from direct originations as representative of a decline in bank support for the housing market more generally.
Mortgage company reliance on bank funding
Absent stable funding sources such as deposits and liquidity facilities, mortgage companies rely on lines of credit to fund mortgages, which they quickly sell off their balance sheets. Home Mortgage Disclosure Act data shows the higher propensity for mortgage companies to sell off their mortgages compared to banks. Figure 3 shows the percentage of home purchase and refinance loans that are sold by type of institution. Unlike banks, which hold deposits and have stable funding sources that give them flexibility to keep a mortgage on their balance sheet, the thin capital of mortgage companies requires them to sell virtually all of their mortgages. Because mortgage companies are not as heavily regulated as banks, these companies do not publicly disclose detailed financial information as required of banks in their Call Reports
According to Fitch Ratings, bank funding supports 60 percent or more of the balance sheets for non-bank mortgage companies. Figure 4, from Fitch, breaks down the different types of borrowing by some of the largest mortgage companies. As the figure clearly illustrates, so-called warehouse lines of credit from banks are the dominant financing mechanism for mortgage companies. While data on these lines of credit are limited, it is important to explain how warehouse lines of credit work and show how banks play a key role in providing liquidity to mortgage companies and support the housing market beyond direct mortgage originations.
Warehouse lending is best defined as lending from financial institutions (primarily banks) to independent mortgage companies to originate a mortgage. This lending can be supported by any bank liabilities, including FHLB advances. Figure 5 provides a flowchart of how the process works and how a line of credit allows a mortgage company to process a large number of mortgage originations, while not needing a lot of capital to do so.
The volume of warehouse lines of credit has grown along with the rise in mortgage originations by independent mortgage companies. Data from the Washington State Department of Financial Institutions helps illustrate trends in warehouse lending and illustrates how large banks contribute to this market.
This dataset shows financial information of mortgage companies that originated a mortgage in Washington state, so while it is only a segment of the overall warehouse lending market, the dataset includes information on 418 of the 972 mortgage companies that originated mortgages in 2019. As figure 6 illustrates, the sum of approved warehouse lines of credit significantly increased from $59 billion in 2013 to almost $134 billion in Q1 2020. Furthermore, lines of credit understate the impact of bank lending. Once originated, a mortgage generally stays on the lender’s books for only a short time before it is sold and securitized. Assuming the average hold time is 45 days, originators can tap their lines of credit up to eight times a year, so $134 billion in warehouse lending capacity has the potential to facilitate over $1 trillion a year in mortgage originations. The growth in this market directly correlates with the rise in the market share of mortgage companies.
A better debate
Despite this significant increase in lending by banks to mortgage companies, policy discussions typically only focus on direct mortgage originations and fail to account for bank support of mortgage companies. The November 2023 FHFA Report on the Home Loan Banks noted that, “depository institutions (banks, credit unions, and thrifts) that are eligible for FHLBank membership account for a decreasing share of home mortgage lending in general.” Later in that section of the report, FHFA said, “Shifts in the housing finance market and changes in the composition and activities of member institutions raise questions about the types of entities that should have access to FHLBank products and services, as well as concerns about how effectively the FHLBanks are achieving their mission to provide liquidity and support for housing finance.”
As previous ABA analysis highlighted, this ignores the fact that much of the collateral required to borrow from FHLBs (mortgage-backed securities, mortgages, some commercial real estate which includes multifamily housing, etc.) also supports the housing market. FHFA’s rhetoric fails to account for the significant reliance mortgage companies have on banks and how warehouse lines assist the housing market even in the absence of uniform eligibility of warehouse lines across the FHLB system as collateral for FHLB advances. Ignoring these facts does a disservice to the role that banks continue to play to support the housing market.
As this staff analysis illustrates, because mortgage companies do not hold deposits or have access to liquidity facilities, they are heavily reliant on banks to originate mortgages. This form of bank support for the housing market has not been fully recognized by many policymakers, specifically when it comes to FHLB membership and the funding provided via advances.
Future analysis by ABA will provide additional examples of ways that banks support the housing market outside of direct originations to further show not only the continued role banks play in helping Americans achieve homeownership but also how the FHLBs help make that support possible.
Dan Brown is an economist and senior director on ABA’s economic research team.