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Ragin Contagion in Non-Bank Finance


New York | Reading the financial press over long holidays in essential. In the days immediately before or after a holiday, there are inevitably important news items that will be missed. Exhibit 1 is the festering situation in the world of non-bank mortgage finance, where a combination of excessive regulation and interest rate manipulation by the Federal Open Market Committee has set the industry on a collision course with reality in 2019.

Eddie Small at The Real Deal in New York summarized the situation:

“Lenders are trying to navigate the new landscape using tactics like selling their mortgage-servicing rights or lending to borrowers they would have previously overlooked. Dan Gilbert, chairman of the largest nonbank lender Quicken, told the Journal that purchase mortgages are becoming more central to the company’s business.”

Let’s set the stage. Back in 2008, the FOMC opened the proverbial floodgates, pushing interest rates down to near zero and ushering in a bull market in both commercial and residential real estate starting in 2012. To give you a sense of just how far up the FOMC has manipulated home prices, the chart below shows loss given default (LGD) for the $2.5 trillion in bank-owned 1-4 family mortgages.