The Role of IMBs in the US Mortgage Market

By Robert Broeksmit, CMB – President and Chief Executive Officer, Mortgage Bankers Association

The housing market in the United States has largely recovered since the depths of the recession more than 10 years ago. Foreclosures are at their lowest level in more than 30 years; home prices have rebounded; demand is strong. The housing-finance industry has been vastly transformed as well. Mortgage professionals now operate in one of the safest regulatory environments in recent memory, thanks to numerous new federal laws and regulations. These regulations have eliminated the risky products that led to the financial crisis, and they protect consumers in the process. Other rule changes have strengthened safety and soundness standards for lending institutions of all types and require the licensing and/or registration of individual mortgage loan officers. 

One unintended consequence of the new regulatory environment, however, is that banking institutions have pulled back significantly from the mortgage market due to a variety of factors—compliance costs, regulatory and reputation risks, and better profit margins in other lines of business. Large depository lenders have pulled back sharply—especially from Federal Housing Administration (FHA)-insured lending—and many community banks have exited the market altogether. 

Fortunately, as this has happened, independent mortgage banks (IMBs) have stepped in to fill the void and now make up a significant portion of home-mortgage lending. By 2018, IMBs accounted for 55 percent of the overall single-family mortgages made, compared to 24 percent in 2008. IMBs have registered a similar increase in market share for the servicing of mortgages. The expanded role of independent mortgage banks has supported and strengthened the US housing-finance system at a critical time.

A significant shift in market share in any sector of the economy naturally generates policy concerns, and even more so in financial services. Not surprisingly, concerns have been raised about the growing role of IMBs in housing finance, but many of those worries are rooted in misperceptions about their business models and the regulatory frameworks in which they operate. 

The role of IMBs is simple. They help diversify the mortgage market by expanding risk across a larger number of mortgage lenders and servicers and by fostering greater competition and innovation in the marketplace. Without the contribution of IMBs, millions of Americans would not have the same access to the mortgage market.

According to data related to the 2018 Home Mortgage Disclosure Act (HMDA), 914 IMBs operate across all 50 states. IMBs are non-depository institutions and access short-term lending, typically from a bank and known as  warehouse line of credit, to originate their loans. The borrowing is secured by the funded loans until they are sold to investors (typically through Fannie Mae or Freddie Mac, also known as the government-sponsored enterprises or the GSEs) or issued as securities (usually guaranteed by Ginnie Mae or Government National Mortgage Association). In effect, IMBs import capital from Wall Street to Main Street. IMBs, which were created more than 100 years ago, can range in production volume from $100 million to almost $100 billion annually.

Because IMBs do not hold loans on their balance sheets, it has been suggested they do not have “skin in the game” and do not have incentives to make high-quality loans. On the contrary, IMBs are deeply invested in originating responsible, high-quality loans and in the long-term sustainability of the housing market. They are typically “monoline” companies, exclusively focused on providing home-mortgage financing, mortgage servicing and other closely related services. As a result, they stay in the market through all cycles, regardless of interest rates, economic…