UPDATED May 14, 11:45 a.m.: If you’re looking to get a home mortgage or refinance an existing one in South Florida, odds are you’re just as likely to turn to a nonbank lender as a traditional bank.
Since the recession, the mortgage landscape in the Miami metro area and across the country has changed drastically. Nonbank financial institutions, including giants like Quicken Loans and LoanDepot, originated 48.3 percent all mortgages in the U.S. in 2016, up from 30 percent in 2012, according to a recent paper by researchers from the Federal Reserve Board and the University of California, Berkeley.
In South Florida, Quicken Loans has surpassed Wells Fargo as the biggest home loan originator, with $1.57 billion in residential loans in 2017. And out of the 15 largest residential mortgage lenders in South Florida last year, nonbank lending accounted for 70 percent of the residential loans made, according to research from the property data firm ATTOM Data Solutions.
The growth of these mortgage companies in South Florida, a place that was the epicenter of the subprime mortgage meltdown, is raising some concerns about the risks of moving mortgages to a less regulated corner of the market. To others, however, these new entrants are providing an easier way for low-income borrowers to get a mortgage in a place with major affordable housing challenges.
Origins of the nonbank lender
Before the financial crisis, banks originated nearly three quarters of all mortgages, according to data from the Home Mortgage Disclosure Act. But around 2009, things started to change.
Millions of borrowers defaulted on their mortgages, leaving banks with massive losses. In turn, federal regulators started levying millions of dollars in fines on those banks for bad mortgages. Compliance costs increased and banks started backing away from originating residential mortgages.
Nonbanks — or mortgage companies that are not subsidiaries of a bank or bank holding companies — began filling the void. Having no overhead or legacy costs from the financial crisis, these companies claimed they could originate mortgages at a lower cost to consumers than banks.
Rather than having a large team of loan officers review one loan, nonbanks said they could utilize new technology and reduce labor costs.
“The root cause of banks leaving the market is cost to produce,” said Jason van den Brand, CEO of the online home financing company, Lenda. “They charge ridiculous amount of commission that now our tech can do for free.”
In South Florida, the changing of the guard in the mortgage world was best captured by a January 2016 announcement from Miami Lakes-based BankUnited. BankUnited, the area’s largest bank by assets, said it would no longer be writing residential mortgages, citing low profit margins and lack of scale.
“We can’t make money in the business,” said BankUnited CEO and chairman John Kanas in a conference call with analysts at the time.
Since then, other tri-county banks have also announced changes within residential lending divisions.
In January, Doral-based U.S. Century Bank, South Florida’s ninth-largest bank by assets, announced that it would “outsource its residential lending” to a strategic partner to reduce costs.
“Consumers are increasingly demanding speed and a great customer experience from their financial services providers,” said Ray Ruga, the founder of Fintech Americas, an annual conference for financial institutions. While banks have pricing advantages overs nonbanks, he said, “they tend to lag when it comes to offering fast and convenient digital service.”
But while nonbank lending platforms appear to provide easier access to getting a mortgage or refinancing, the paper by researchers from the Federal Reserve Board and UC Berkeley said these alternative lenders could face liquidity risks and have fewer safeguards to protect themselves if borrowers began defaulting on their payments.
“The typical nonbank has few resources with which to weather these shocks,” the paper stated.
A nonbank failure could be particularly harmful to low-income borrowers, according to the researchers. That’s because those alternative lenders now account for roughly 75 percent of mortgages insured by the Federal Housing Administration or the U.S. Department of Veterans Affairs.
“Because this [nonbank lender] is one step removed from the banks it is not getting the regulatory scrutiny or understanding that it would otherwise,” said Marcus Stanley, policy director of Americans for Financial Reform, a nonprofit advocacy group.
Detroit-based Quicken Loans, which was founded by the owner of the Cleveland Cavaliers, Dan Gilbert, has reported the biggest growth in residential mortgage lending in the Miami metro area between 2015 and 2017. Its total amount of home mortgage lending increased more than 21 percent to $1.57 billion in 2017.
Much of the company’s growth in South Florida likely stemmed from the success of its online lending platform, Rocket Mortgage. That was introduced in 2015 and advertises that borrowers can be approved for a loan through its application in just eight minutes.
“Dan Gilbert has one of the best basketball players in the world,” said Ken Thomas, a South Florida independent banking analyst and economist, referring to LeBron James. “He also has one of the best mortgage providers in the world and anyone that tries to compete with him is going to be beat.”
Parallel to Rocket Mortgage’s rise, Wells Fargo, the largest residential mortgage lender in South Florida in 2015, saw its residential mortgage lending fall 29 percent to $1.37 billion. That’s down from $1.93 billion between 2015 and 2017, based on ATTOM data. Likewise, SunTrust Mortgage saw a 14.5 percent decline during the same two-year period in the total dollar amount of its residential mortgage lending in South Florida.
“There’s always risk when a new player comes in,” Thomas said. But he adds, “If we can get more mortgages out at a lower cost, that’s a benefit to the community.”