Supervisors Symposium

MORTGAGE DEFAULT PUTS STRAINS ON NONBANK MORTGAGE COMPANIES

• Liquidity strain • When borrowers don’t make their mortgage payments, servicers have to make payments on their behalf • Servicers are eventually reimbursed, but have to finance payments in the meantime • Ginnie Mae servicers advance payments until the default is resolved • Fannie and Freddie servicers advance for four months • Solvency strain • FHA andVA insurance does not cover all the losses associated with mortgage default • Fannie and Freddie guarantees cover most of the losses

NONBANK ACTIONS CAN ALSO INCREASE THE CHANCES OF MORTGAGE DEFAULT

• Nonbanks can affect the chance that a borrower defaults by the care that they take in underwriting and servicing loans

• Academic literature shows that originators and servicers with more “skin in the game” (such as more capital) put more effort into origination and servicing