- Since the 2008 financial crisis, legacy banks have witnessed a decrease in their share of the banking market.
- The ability of nonbanks to leverage digital technology has allowed them to meet customers’ efficiency and convenience demands through online services.
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Since the 2008 financial crisis, legacy banks have witnessed a decrease in their share of the banking market. The ability of nonbanks to leverage digital technology has allowed them to meet customers’ efficiency and convenience demands through online services.
Without having to adhere to the specific regulations that incumbent banks face, nonbanks and alternative lenders have garnered the attention of underserved individuals looking to buy or refinance their homes by reducing interest rates and minimizing down payments.
What is a nonbank mortgage loan?
Nonbanks are financial institutions that offer typical bank-related lending services, like mortgage lending, while providing users an easier path to obtaining loans.
Many non traditional mortgage lenders offer services ranging from first-time home loans to refinancing options. Even though nonbanks offer loans, they cannot offer deposit services such as a checking or savings accounts. Because of this, nonbanks fund mortgage loans by using credit — they sell the mortgages to investors while maintaining the responsibility of collecting payment from consumers.
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Nonbank mortgage industry services
Nonbank mortgage lenders offer similar services to those of traditional institutions — but with lower down payments and fewer financial criteria. Because nonbanks operate without full banking licenses, they don’t have to adhere to as many regulations as legacy banks — resulting in faster loan approvals and more flexible rates.
Most nonbank mortgage lenders offer consumers two major services: home loans and loan refinancing. Home loans can include fixed loans, Federal Housing Administration loans, United States Department of Agriculture loans, jumbo loans, and reverse mortgage loans. Refinancing options offered by nonbank institutions oftentimes include lowering monthly mortgage payments and consolidating debt.
Top alternative mortgage lending sources
There are many alternative lending companies that have garnered success due to the ability to offer underserved users access to mortgage loans through digital channels. These are some of the top mortgage lending services right now:
- Quicken Loans: With the launch of Rocket Mortgage in 2015, Quicken Loans altered the traditional home loan application process by offering users a mortgage application that takes less than 10 minutes to complete.Rocket Mortgage altered the home loan application process Quicken Loans
- LoanDepot: In 2017 LoanDepot introduced a suite of tools that allows consumers to fill out mortgage loan applications conveniently from their smartphones – attracting attention from tech-savvy users seeking a convenient application process.
- Better.com: This US-based startup has funded over $4 billion in loans since its launch in 2016 — helping more than 20,000 consumers buy or refinance their homes.
Nonbank & alt mortgage loan regulation
The nonbank and non traditional mortgage sector has grown due to technological innovation and a decline in lending by banks. And in recent years, nonbanks have stepped up to fill market voids left by traditional banks after the 2008 financial crisis. According to the Conference of State Bank Supervisors, these roles include:
- Virtually making the market today for housing policy interests focused on access to housing credit for low- to moderate-income, minority, and veteran borrowers.
- Assuming the role of “specialty” servicers for consumers making payments on previously troubled borrowings.
- These loans are more costly and difficult to manage than conventional, conforming loans, and state regulators point out that nonbanks have performed better in taking care of these consumers than many of their large bank counterparts did.
However, the performance of these vital roles must be balanced against risk. One potential risk could include the rising volume of loans in product categories that inherently carry more underwriting risk—such as FHA loans with lower credit scores and higher loan-to-value and debt-to-income ratios.
Present & future of the alternative mortgage lending industry
Insider Intelligence’s research finds that amid growing customer demand, nonbanks continue to threaten incumbents. A study of 5,200 consumers from Oracle’s Digital Demand in Retail Banking study found that over 40% of customers believe nonbanks are a better lending option than traditional banks.
This continued pressure from nonbanks has forced incumbents to digitize or advance their online offerings — however the ability of nobanks to reduce loan processing time and cut interest rates will make it difficult for traditional banking institutions to compete.