Magazine article American Banker

Nonbank Loan Sales to GSEs Skyrocket, and So Do Risks: Watchdog

Magazine article American Banker

Nonbank Loan Sales to GSEs Skyrocket, and So Do Risks: Watchdog

Article excerpt

Byline: Kate Berry

Nonbank mortgage lenders pose greater risks to Fannie Mae and Freddie Mac because they have limited government oversight and generally weaker finances than banks, according to a government watchdog report.

Small lenders and nonbank mortgage firms often lack sophisticated systems or do not have the expertise to manage high volumes of mortgage sales. These problems increase the risk that the government-sponsored enterprises will suffer losses, according to the report due for release Thursday by the Federal Housing Finance Agency's Office of Inspector General.

The GSEs are purchasing more loans than they have in recent memory from small lenders and nonbank mortgage companies largely because large banks pulled back from selling to Fannie and Freddie after getting clobbered with repurchase requests.

Some nonbank lenders also have an elevated risk of what the inspector general called "reputational harm." One unidentified nonbank lender became a top 20 seller to one of the GSEs during the refinance boom of 2012 and 2013, even though this outfit had engaged in abusive lending practices, according to the report.

State regulators filed enforcement actions against the lender and the FHFA terminated the GSE's relationship last year after an on-site review found deficiencies in the company's processes for fraud prevention and quality control.

The shift in the mix of lenders selling loans to Fannie and Freddie is striking.

Last year, 47% of Fannie's mortgage purchases came from nonbank mortgage companies, up from 33% in 2011. …

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