Liquidity Crises in the Mortgage Market

Kim, You Suk; Laufer, Steven; Pence, Karen M.; Stanton, Richard; Wallace, Nancy

doi:10.17016/FEDS.2018.016r1

Working Paper

Liquidity Crises in the Mortgage Market

Abstract: Non-banks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how non-bank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how the same liquidity issues unfolded during the financial crisis, leading to the failure of many non-bank companies, requests for government assistance, and harm to consumers. The high share of non-bank lenders in FHA and VA lending suggests that the government has significant exposure to the vulnerabilities of non-bank lenders, but this issue has received very little attention in the housing-reform debate.

Keywords: FHA; Ginnie Mae; Mortgages and credit; Financial crisis; Mortgage servicing; Nonbank institutions;

JEL Classification: D12; D18; E58; G21; G23; G28;

https://doi.org/10.17016/FEDS.2018.016r1