March 2018 (Revised June 2018)

Liquidity Crises in the Mortgage Market

You Suk Kim, Steven M. Laufer, Karen Pence, Richard Stanton, and Nancy Wallace


Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in the aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate

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Keywords: FHA, Ginnie Mae, Mortgages and credit, financial crisis, mortgage servicing, nonbank institutions


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Last Update: January 09, 2020