It’s hard to know how scared to be if you don’t know the size of the threat. No, not terrorism, housing.
The U.S. mortgage-lending business is a sprawling, varied enterprise that no one regulator oversees, making it impossible to know how many mortgages or lenders not insured by the government are in trouble.
Even worse, no public records are available to show who holds the trillions of dollars worth of mortgages that investment banks pooled and sold as securities to investors around the globe. The value of many of those securities plunge as mortgage defaults soar.
“You can’t get your arms around the size of the problem. ... I don’t think that anybody knows that number,” said David Jones, president of Denver-based consulting firm DMJ Advisors and a former Federal Reserve economist.
About 90,000 nonbank mortgage lenders dotted the landscape last fall, when state regulators conducted their first formal survey. Dozens of bankruptcies and closings in recent months have likely whittled that number, and 25,000 workers lost jobs in August, aggravating worries about the downturn’s impact on the economy.
Large numbers of the nonbank companies were based in California (around 4,100) and Florida (12,900), states where the real estate boom was especially heated, and now on the downswing, among those posting the highest number of foreclosures.
States license 90,000 or so “nonbank” companies, which include brokerages that lend on behalf of other mortgage companies. Relatively few nonbank lenders, such as Countrywide Financial Corp., the nation’s largest mortgage lender, are publicly traded and required to disclose financials regularly.
For a number of reasons, including a lack of resources, the activities of nonbank lenders are not scrutinized the way federal regulators oversee insured institutions, such as commercial banks or savings and loans. That means state regulators generally don’t release detailed reports about the lenders’ financials.
Other indications of how massive the mortgage lending universe is and how difficult it is for regulators to track include:
- In addition to the 90,000 licensed nonbank firms, there are some 63,000 branches scattered nationwide, according to the 2006 survey by the Conference of State Bank Supervisors.
- The survey also tallied 280,000 loan officers at these companies although 13 states and the District of Columbia don’t license loan officers, so the total number was much higher. The states are Alabama, Arizona, Delaware, Georgia, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, North Dakota, Pennsylvania, Virginia and Wyoming, and some of them are moving toward requiring officer licensing.
Experts say making forecasts about the length and depth of the housing market slump is possible by tracking changes in interest rates, home sales, foreclosures and other indicators. Yet not having specifics on how many mortgages or nonbank lenders are getting squeezed has potentially damaging ramifications for investors and policy-makers.
Over the past five years at least, state-licensed lenders made 70 percent of mortgages issued annually — totaling $2.8 trillion in 2006.
Of the 8,615 institutions backed by the federal deposit insurance fund, only about 800 had 50 percent or more of assets in mortgages or mortgage-backed securities.
Industry behemoths, such as CountryWide and IndyMac Bancorp. Inc., were shoved into the spotlight when Wall Street began to home in on the financial fallout of too many mortgages made to borrowers with subprime or weaker credit in the final years of the real estate boom.
There are a host of smaller companies, some specializing in high-risk subprime mortgages, that investors are now being made aware of as default and foreclosure rates soar.
Meanwhile, while home sales exploded the past two decades, thousands of mortgages were bundled and sold to institutional investors. The practice spread credit risk among millions of investors, making homeownership more affordable. But now, no one knows who holds the loans that may be at risk of default and who is liable if they do.
State regulators are doing what they can, says Bill Matthews, senior vice president of CSBS. Last fall’s survey was designed to help create a national registry of state-licensed mortgage companies and loan officers.
When it launches in January, searches will reveal the record of a company or individual, including enforcement actions against them in different states.
While some lenders are harder hit than others, experts say, banks and other firms that stuck with conventional, fixed-rate mortgages — as opposed to subprime loans with “teaser” rates that balloon after a few years — could fare relatively well in coming months.
“They do have the credit-crunch problem. They’re as nervous as everybody else” about being able to make loans, said Howard Glaser, an industry consultant who was a senior housing official in the Clinton administration. “But they don’t have the losses.”
Even so, the impact of surging mortgage defaults is evident at federally regulated lenders. Past-due loans at federally insured institutions jumped 10.6 percent last quarter, to $6.4 billion, the Federal Deposit Insurance Corp. said last week. Nearly half the increase came from mortgages while profits fell 3.4 percent from a year earlier to $36.7 billion.
As anxious investors await new mortgage data, the many unknowns caused by a patchwork of state and federal regulation will remain a key complication.
Not knowing the problem’s scope “may be one of the biggest” concerns, Jones says.