By Peter Miller
There has always been competition in the mortgage industry, but now borrowers increasingly find themselves with a new option: financing from a nonbank.
What’s a nonbank, and how do they work? Is it safe to get a mortgage from one?
Go back to the 1980s and the mortgage field was largely dominated by savings-and-loan associations. These so-called thrifts were local financial institutions mainly established to do little else but offer mortgages. Then came the savings-and-loan crisis between 1986 and 1995, and more than a thousand S&Ls closed.
The mortgage business formerly done by the S&Ls was largely taken over by existing competitors such as banks, mortgage bankers, and mortgage brokers. For borrowers, the important point was that access to the mortgage marketplace wasn’t interrupted.
The New World of Nonbanks
Today a new set of players has entered the mortgage field — “nonbanks” such as Quicken Loans, loanDepot, New American Funding, and Carrington Mortgage Services. And the emergence of these new competitors means that borrowers will continue to have a broad range of mortgage choices.
So what is a nonbank, and is it safe to do business with them?
In basic terms we can see a “bank” as a regulated financial institution which, in large measure, gets money to lend from its depositors. Today, our largest financial service companies, such as Bank of America and Wells Fargo, are all banks.
A “nonbank” can be seen as a financial intermediary. Instead of depositors, a nonbank gets its funds from investors, debt (via bond sales), or by borrowing from commercial banks. It takes that money and loans it to borrowers. The fees and interest collected — as well as principal repayments — are then used to repay the capital with interest.
“Not only does the source of funds differ between banks and nonbanks, so do their operations,” said Rick Sharga, executive vice president at Auction.com. “Nonbanks have no tellers, ATMs, bank branches, or drive-in windows, and the result is a very lean operating basis. Most nonbanks also focus on a limited number of loan products, and focus all of their efforts and business practices on optimizing those products.”
Borrowers seem very comfortable with the idea of nonbanks. According to J.D. Power & Associates, in 2014 the mortgage lender which ranked highest in primary mortgage origination satisfaction was not a traditional bank — it was Quicken.
Borrower happiness is also reflected in the growing use of nonbanks. The financial publication Inside Mortgage Finance reports that in the first quarter, 12 of the top 20 mortgage originators were nonbanks. According to Mortgage Daily, the three largest lenders during the same period were Wells Fargo ($49 billion), Chase ($25 billion), and a nonbank, Quicken ($19 billion).
With such growing popularity the question for borrowers is fairly plain: Should you consider a nonbank when financing or refinancing real estate?
The answer is that a mortgage is a mortgage. A VA, FHA, or conventional mortgage is the very same product, whether it comes from lender Smith or lender Jones. It’s a commodity, so the real issue for borrowers is finding the best rates and terms that fit your particular needs. To be successful you have to shop around.
Banks and nonbanks both have to play by the same rules set in motion through Dodd-Frank. For instance, they must all use the new disclosure and closing forms scheduled for introduction in 2015. The “qualifying mortgage” standards are the same for everyone. And, whether banks or nonbanks are involved, the Consumer Financial Protection Bureau has the authority to supervise virtually all mortgage originators, brokers, and servicers.
For borrowers, the emergence of nonbanks is likely a good thing — for two reasons.
First, there’s more competition in the marketplace, and that’s always good for consumers.
Second, nonbanks represent the growing use of electronic platforms and new forms of service delivery. Now everyone — banks and nonbanks — is online.
“What used to be a competitive disadvantage – the lack of brick-and-mortar locations – has turned into an advantage today for nonbank lenders,” Sharga noted. As more and more borrowers shop for and secure their mortgages online, nonbanks can compete aggressively, and successfully, with retail banks on the Internet.”
The historically low mortgage rates we’ve seen recently are the result of many different factors, including the Federal Reserve’s monetary policy. But it’s hard to ignore the idea that lower operating costs, greater efficiencies, and additional competition from new players have helped reduce financing costs — trends influenced at least in part by the emergence of nonbanks. And those are trends every borrower should welcome.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, have sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post, and Auction.com. Miller has spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.