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What’s the Deal with ‘Nonbanks’?

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Posted On: 03/23/2016

Question: In the course of looking for a mortgage we met a loan officer who said he worked for a “nonbank.” What happens if we get a mortgage from a nonbank and the company goes out of business?

Answer: For you as a borrower, nothing.

In general terms, a bank is an institution that seeks deposits, has one or more branches, employs tellers, protects depositor accounts through membership in the Federal Deposit Insurance Corporation (FDIC) and has the right to borrow through the Federal Reserve.

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Traditionally, the money banks lend to consumers comes from consumer deposits, but that’s not the whole story now. Today banks sell some or all of their mortgages in the secondary market. They use the money earned from such sales to create more loans with new fees and charges. The mortgages the bank retains are called portfolio loans.

A nonbank has no deposits, no tellers, no branches and no access to the Federal Reserve. Nonbanks make loans from their own capital and with funds borrowed from banks and other capital sources. The mortgages made by nonbanks are sold into the secondary market; they use the money to pay back the nonbank’s loans or replenish capital.

For a borrower, what counts is the ability of a lender to deliver financing on time with promised rates and terms. Whether that mortgage comes from a bank, a nonbank or Uncle Wally doesn’t matter.

Let’s say you get financing from a nonbank, a conglomerate called Potomac Shores Lending, Hip Replacement & Brewing – PSLHR&B. You get your loan and a year later the company goes bankrupt. Most likely PSLHR&B doesn’t own the loan; it’s been sold to an investor.

What does the investor care about? That all payments are made on time and in full. Can the investor change the loan terms? Nope. The mortgage is a contract that was passed around in the financial world, maybe more than once. As long as you do your part, the investor can do nothing but graciously accept your payments.

Although banks still hold the majority of the mortgage servicing assets in the country, the 5 largest nonbank servicers saw their market share grow by between 30 and 350 percent between 2001 and 2014, according to the Mortgage Bankers Assoc.

As a borrower your goal is to get the best rates and terms for which you qualify, allowing banks and nonbanks – to say nothing of credit unions, mortgage brokers and mortgage bankers – compete for your business.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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