A quick thread on nonbank servicing (that literally no one asked for).

Today, some Members of Congress called for a Fed bailout of nonbank servicers. Who's that? Ex: Quicken, Mr. Cooper and Freedom Mortgage.

See:
https://financialservices.house.gov/uploadedfiles/cmw_brown_ltr_cares_act_-_title_iv_4152020.pdf & https://www.warner.senate.gov/public/index.cfm/2020/4/warner-leads-colleagues-in-urging-action-to-avoid-housing-finance-system-crisis-amid-covid-19-outbreak

I get it. If they fail, it'll be a huge mess. Bad for consumers (though manageable). Messy for the entire market as the value of servicing rights plummets. Probably bad for originations, too, at a time when we need to keep credit flowing.

But keep in mind, the last time we went thru a crisis, a decade ago, most of the nonbanks in the mortgage business collapsed: Countrywide, Ameriquest, New Century.

We knew this market was fragile.

So we instituted rules to make mortgages safer.

But we didn't really do much to make these fragile nonbank firms more resilient. They lobbied against those things and they won. (They also lobbied more than anyone to weaken borrower protections on mortgages, too. But I digress).

And now here we are. They've become just like their bank competitors in 2008: Too Big to Fail. Instead of collapsing, they're holding our mortgage market hostage.

The failure here is asking the Fed to bail them out without addressing any of the root causes of their fragility. Sure, this pandemic is really bad. But it's no excuse to extend no-strings-attached money to an industry that fought regulation tooth and nail for years. <end>