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Yellen spoke during a meeting of the Financial Stability
Oversight Council, a regulatory body she chairs and which was
created after the 2007-2009 financial crisis. It is tasked with
managing risks to the financial system.
The council, whose members head other top financial regulators,
voted unanimously to approve publishing a report and related
recommendations on the issue.
THE TAKE
Regulators are moving to cover what they say is a gap in their
power to address risk in what is now a large and growing
majority of the mortgage market.
The proposal unveiled on Friday includes a recommendation that
Congress establish an industry-financed fund to provide
liquidity to failing nonbank mortgage services, addressing a
problem that industry pointed to at the start of the COVID-19
pandemic.
KEY QUOTE
"Put simply, the vulnerabilities of nonbank mortgage companies
can amplify shocks in the mortgage market and undermine
financial stability," Yellen said in prepared remarks.
"We need further action to promote safe and sound operations,
address liquidity risks, and promote continuity of servicing
operations when a servicer cannot perform its critical
functions."
CONTEXT
While they offer some advantages over traditional lenders,
nonbanks also present unique challenges, according to Yellen.
Nonbanks can have high leverage, short-term funding and be more
exposed than banks to fluctuations in the values of mortgage
servicing rights and housing prices, as well as changing
interest and delinquency rates, she said.
The failures of nonbanks could harm borrowers and leave the
federal government to take on servicing obligations, with larger
disruptions in the sector possibly restricting mortgage lending,
according to Yellen.
She said the FSOC report would recommend that state regulators
tighten prudential standards and that Congress consider
legislation to ease coordination among regulators and give
greater powers to the Federal Housing Finance Authority and the
Government National Mortgage Association, or Ginnie Mae, among
other changes.
(Reporting by Douglas Gillison; editing by Jonathan Oatis)
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