Nonbank mortgage companies remain a threat to the financial system

Earlier this year, I completed my term as a senior fellow at the Consumer Finance Protection Bureau. I joined CFPB in 2022 after a long career as an investment banking advisor to regional banks and other financial institutions. My work at the CFPB included representing the bureau on the Financial Stability Oversight Council’s Systemic Risk Committee and Nonbank Servicing Task Force, and I had the privilege of contributing to the May 2024 Nonbank Mortgage Servicing Report.

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The report laid out the increasingly dominant role nonbank mortgage companies, or NMCs, play in the mortgage market and how their monoline business models and reliance on market funding made them vulnerable to shocks. It warned that a crisis could trigger widespread bankruptcies, removing significant servicing capacity from the market, disrupting borrowers’ ability to manage their loans, and triggering losses elsewhere in the financial system.

The choke points identified by FSOC have narrowed further in the two years since the report was published. Data from the Urban Institute suggests the already high nonbank share of mortgage originations has grown by another couple of percentage points. In addition, the sector has grown more concentrated as a result of merger activity. In October of 2025, Rocket Companies completed its acquisition of Mr. Cooper Group, “bringing together the country’s largest home loan originator and the largest mortgage servicer.” In December of 2025, UWM Holdings Corporation announced its acquisition of Two Harbors Investment Corp, combining “the #1 overall mortgage lender” and “one of the largest servicers of conventional mortgages in the country.”  When this deal closes, the top four publicly traded companies will control roughly half of total nonbank origination and servicing. A disorderly failure of any one of these institutions would severely disrupt the market and trigger wider contagion.

FSOC’s report made a series of recommendations to address this threat. It encouraged state regulators to further enhance their prudential standards. It also asked Congress to grant Ginnie Mae and the Federal Housing Finance Agency additional authorities to monitor risks and expand Ginnie Mae’s ability to lend to servicers during periods of stress. Finally, it recommended Congress “establish a fund financed by the nonbank mortgage servicing sector to provide liquidity to nonbank mortgage servicers that are in bankruptcy or have reached the point of failure.” Bankruptcies are inevitable in a volatile market dominated by companies that lack access to deposits or other stable funding. Establishing a resolution fund would help ensure these failures follow the less disruptive Chapter 11 reorganization model.

This proposed resolution fund provoked an unusual response: A bipartisan group of current and former officials wrote a July 2024 op-ed condemning it as a “terrible idea.” They argued it was a “permanent bailout fund” that would “further entrench the cycle of private gains and public bailouts that pretty much all Americans hate.” Once a fund was established, they suggested “expectations in the market would be that mortgage servicers were guaranteed by taxpayers — undermining market discipline and reviving the cycle of privatizing gains and socializing losses.” While acknowledging that NMCs pose financial stability risks, they urged policymakers to focus instead on strengthening state-level regulation and counterparty capital requirements.

When four highly respected thought leaders come together in such an ecumenical spirit, their arguments should be taken seriously. However, they appear to have fundamentally misunderstood the proposal. The report clearly stated the fund’s objectives should “include avoiding taxpayer-funded bailouts” and making NMCs cover the cost of a more orderly resolution process for failing peers, limiting the extent to which they can free ride on the government’s secondary market support. It bears repeating that the risk of bankruptcy is not remote. If the FHFA hadn’t capped servicing advance requirements during COVID, many NMCs would have run out of cash.

Would the proposed fund put taxpayers at risk? No. The mechanics would resemble the FDIC’s Deposit Insurance Fund in being fully supported by industry assessments. Would the perception of taxpayer support undermine market discipline? Unlikely. Nothing in the proposal lets a failing servicer avoid bankruptcy. The fund would exist solely to maintain the operations of a servicer that already has or is about to file. Indeed, given the spillover damage disorderly bankruptcies would prompt, NMC executives may already expect a bailout and manage their businesses accordingly. Could the threat of bankruptcy be eliminated by raising capital requirements? Not really. Tougher rules at the state and federal level (including designating the largest companies as systemically important) would help, but the U.S. model of prepayable fixed rate mortgages means originations vary with rates. It would be impractical to prefund peak volumes with long-term debt, so the industry will always rely on short-term funding and therefore be at risk of liquidity crises.

If failing servicers lack access to resolution funding, a crisis is more likely to drive a series of disorderly “Chapter 7” liquidations where vendor contracts are canceled, employees are terminated, and operations are suspended due to a lack of cash. Bankrupt companies will have already depleted their cash reserves in an attempt to stave off filing and their monetizable assets will likely have been seized by counterparties. Resolution could drag on for months as assets are sold. In contrast, if bankrupt servicers have access to a resolution fund, operations can be maintained until the intact platforms are sold in a Chapter 11 process. Proceeds from the sales can then be used to reimburse the fund.

While policymakers could just liquidate failing servicers and let the chips fall where they may, this seems implausible given the politics. If borrowers are unable to make payments or refinance/modify their loans, the government is going to step in. The better approach is to follow the FDIC’s model of maintaining operations during resolution and then mutualizing losses. While one of the op-ed’s authors also objected to the FDIC’s model, that is a dangerous fringe view. The FSOC proposal merely extends the mutual insurance model to another critical sector. Given the explicit guarantee provided on over $9 trillion of GSE mortgage-backed securities and the raft of other subsidies provided to borrowers, policymakers clearly regard “all-weather” access to mortgage credit as essential. It makes little sense to offer these commitments only to leave the market at risk of being throttled by a wave of disorderly NMC bankruptcies.

Without better tools, policymakers trying to manage a crisis will need to improvise in ways that rightly will be seen as a bailout (e.g., by providing a 13(3) facility that advances non-recourse funding to banks against their lending to NMCs). A resolution fund is a modest incremental step that would help maintain vital services without burdening taxpayers. Rather than encouraging risk-taking, it makes bankruptcy a more viable option and therefore reinforces market discipline.