Blockchain payment technologies like Fintech are hot topics right now. However, today’s economy is not yet based on cryptocurrencies and other such technologies. In fact, according to many experts, the real heavy economic lifting is currently done by nonbank lending. Over the past 30 years or so, there has been tremendous evolution and expansion in this particular niche, and even more so over the past decade. In fact, half of the residential mortgage market is now supported by nonbank lenders, something that is also causing some concern.
Non-bank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate. The funding and operational structure of the non-bank mortgage sector remains a significant channel for systemic liquidity risk.
Be that as it may, this is a golden age for hard money lenders, private debt funds, and other non-traditional lending sources. In addition, they are aware of their limitations and risks and are considering methods of improvement. At the same time, they are focusing more strongly on both commercial real estate (CRE) projects and multifamily constructions. This is because there are two big problems with traditional banks: rising interest rates and increasing regulations.
The Growth of the Hard Money Lender
A quick look at financial news will rapidly reveal that all media eyes are on blockchain technology. However, while this has a significant impact, it is nowhere near the impact of the nonbanking sector on the economy. This is shown, for instance, in the volume of financial transactions performed by Fintech.
Transaction Value in the “FinTech” market amounts to US$4,256,048m in 2018. Transaction Value is expected to show an annual growth rate (CAGR 2018-2022) of 17.2% resulting in the total amount of US$8,018,084m in 2022.
They may be impressive figures but the non-banking sector has distributed around $100 billion in annual transactions. This was revealed by Pregin, a financial data firm.
The mortgage industry takes up by far the largest chunk of nonbank lending. Around 50% of residential mortgages were funded by non-traditional lenders in 2016, up from just 20% in 2007. For the VA and FHA insured mortgages, they funded around 75% in 2016. At least 80% of the volume of Ginnie Mae guaranteed mortgages were funded non-traditionally in 2017 as well.
Ginnie Mae (the Government National Mortgage Association) differs from Fannie Mae and Freddie Mac in that it operates as a government agency. It does not issue mortgage-backed securities and its guarantees are backed by the full faith and credit of the U.S. government.
Non-traditional Lenders Expand Their Reach as Small Banks Become Unable to Offer Mortgages
Clearly, non-traditional lenders are increasing their reach, providing services where traditional options are no longer available. Last year, 60% of the Ginnie Mae loan pools were serviced by non-banks, and 35% and 38% of the Freddie and Fannie Mae pools were also funded by them. It is also believed that this growth will only accelerate over the coming years due to the new capital rules put in place by federal regulators, which have affected all banking institutions.
Due to these rules, smaller banks in particular simply cannot offer mortgages anymore, as their portfolio is too large compared to their capital. That said, the risk this poses to small banks has been recognized. As a result, full implementation has so far been delayed while the rules are simplified.
Although some regulatory easing may therefore occur, banks had already started to move away from mortgages and because of the current uncertainty, they have continued to do so. The slack, inevitably, will be picked up by non-traditional lenders. After all, demand for projects will always continue to exist.