The US mortgage industry is seeing its first lenders go bankrupt after a surge in lending rates, and the wave of bankruptcies ahead could be the worst since the housing bubble burst 15 years ago.
A systemic collapse is not looming this time, because there has not been the same level of excess lending and because many of the largest banks pulled out of mortgages after the financial crisis. Still, market watchers expect a series of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers and potentially a rise in some loan rates. A larger part of the business is now controlled by independent lenders, and with mortgage volumes falling this year, many are struggling to stay afloat.
“Nonbanks are undercapitalized,” said Nancy Wallace, president of the real estate group at Berkeley Haas, the business school at the University of California, Berkeley. “When the mortgage market crashes, they are in trouble.”
In 2004, only about a third of the top 20 refinance lenders were independent companies. Last year, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which tracks the mortgage lender industry. Since 2016, banks have seen their market share shrink to a third from about half, according to news and data provider Inside Mortgage Finance.
Many so-called shadow lenders will emerge relatively unscathed from this downturn. But some lenders have already gone out of business or have downsized dramatically, including Sprout Mortgage and First Guaranty Mortgage Corp. Both specialize in riskier loans that aren’t eligible for government backing.
First Guaranty, a company that court documents show is majority-owned by fixed-income giant Pacific Investment Management Co., has filed for bankruptcy protection and said it went bankrupt after it made loans earlier this year that fell in value. He was holding on to those loans until he had enough to bundle them into bonds and sell to investors, and he had been financing them temporarily with a line of credit.
Once interest rates began to rise, lending volume shrank across the industry, according to court documents. That meant the company could no longer find enough new loans to bundle or obtain enough financing to continue operating, First Guaranty CEO Aaron Samples said. Firms including Flagstar Bank and Customers Bank are owed about $418 million, according to court documents.
Independent lenders gained a foothold in the market because banks backed off a lot after the 2008 financial crisis, which began with excessive mortgage lending. Pullback has often been encouraged by regulators, and it’s still happening: Wells Fargo & Co., the biggest Wall Street firm in the US mortgage business, plans to downsize its home-lending empire, Bloomberg reported this week.