A recent article in The Wall Street Journal put a major spotlight on the growth of non-bank financial firms. The article illuminated that the growth of non-bank financial firms opens up substantial business opportunities for alternative forms of credit as traditional banks are experiencing tighter regulations from Washington. Morgan Stanley, Bank of America and Goldman Sachs, among others, have all sold mortgage-servicing rights to non-bank companies.
U.S. Firms Leading the Way
The U.S. has an established non-bank lending sector, especially compared to Europe where it is so engrained in people to visit a bank rather than a non-bank lender, thus making the transition from banks to non-bank lenders easier for consumers and mortgage professionals in the U.S.
“In North America, by contrast, there is a mature non-bank lending sector…and it would appear this increased diversity is one of the reasons why the supply of credit is not such an issue in the U.S. as it is in Europe,” said Richard Hinton of KPMG in “The rise of non-bank credit: Revolution or evolution?”
As a result, there is a “less sense of stress” as the rise of non-bank lenders is seen as a natural progression to fill a gap in the market. Today, non-bank firms hold 17 percent of the market share of mortgage services in the U.S.
Set Worries Aside
Sometimes people are wary of non-bank lenders due to the lack of name recognition and curiosity about regulation.
“Many borrowers are suspicious of the loans offered by smaller, non-bank lenders. Most consumers say, ‘Who are these people?’ but the fact is that these are mainstream loans with good pricing,” said Glen Corso, the managing director of the Community Mortgage Banking Project in The New York Times’ “Nonbank Lenders Staging a Comeback.”
Additionally, the U.S. government has made the regulation of non-bank lenders a top priority through recent legislation, such as the establishment of the Consumer Financial Protection Bureau as an independent agency by the Dodd-Frank Act, which strengthens the regulatory oversight of non-bank providers.
The Benefits of Non-Bank Lenders
Non-bank lenders taking a more prominent place in the industry has significant benefits. Non-bank lenders are usually smaller, thus have lower operating costs. The New York Times reported that non-bank lenders often offer rates that are 0.125 to 0.375 percentage points below those offered by major banks.
“A Big Push From Small Lenders” points out that regional companies, such as Southeast Mortgage, hire the best-qualified talent in the area. Local talent is especially important to borrowers in competitive and complex real estate markets, such as Atlanta.
“America cannot be housed with just bank lenders,” Anthony Hsieh, chief executive of LoanDepot in California. “Nonbank lenders are extraordinarily important, which is why you’re starting to see investment in new companies.”
As $1.03 trillion of mortgage-servicing rights were sold last year, with a significant portion going to non-bank firms, it is clear that we are entering an era of opportunity for alternative credit.