U.S. regulatory panel flags nonbank mortgage lenders as potential risk By Reuters

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U.S. regulatory panel flags nonbank mortgage lenders as potential risk

By Pete Schroeder

WASHINGTON (Reuters) – A U.S. regulatory panel is recommending increased federal and state oversight of nonbank mortgage lenders and servicers, saying for the first time in a report on Wednesday that their growing presence in the sector may threaten financial stability.

The panel of top U.S. regulators led by the Treasury Department had never flagged the issue as a systemic risk in previous annual reports, only that it was keeping an eye on the nonbank mortgage market. The report, which called overall risks to the financial system “moderate,” is not binding but could serve as a blueprint for policymakers in the coming months.

The Financial Stability Oversight Council report said nonbank lenders now account for more than half of all new mortgages but are not subject to the same rigorous scrutiny as traditional banks.

Nonbanks originate 51% of all new mortgages compared with just 10% at the height of the subprime mortgage crisis in 2009, according to the panel of the top U.S. regulators which is tasked with identifying systemic risks. Nonbanks service 47% of outstanding mortgages compared to 6% in 2009, it added.

A raft of regulatory and legal problems stemming from the subprime mortgage crisis discouraged banks from extending home loans to riskier borrowers. Bank regulations on mortgage lending have also tightened, which may also have led nonbanks to grab on a larger share, the panel said.

“However, most nonbank mortgage companies have fewer resources to absorb adverse shocks and are more dependent on short-term funding than banks,” according to the report.

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