As the US Treasury market experiences growing instability, a number of more astute independent mortgage bank executives have begun to ponder how to protect themselves and their businesses in a more volatile funding environment. Some have looked at acquiring a depository, while others have considered affiliating with an insurance company.
The basic issue for IMBs is capital. IMBs are primarily focused on originating and selling residential mortgage loans, whether into the market for agency and government securities, or to hard money investors. IMBs perform this vital agency role using borrowed money raised from a bank warehouse lender or in the repo and bond markets. Like most commercial entities, IMBs have net negative working capital.
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The agency role performed by IMBs is first and foremost about acquiring leads and making and selling loans, thus IMBs have traditionally been shut out of owning a bank or being a member of the Federal Home Loan Banks. Because they borrow their working capital by pledging new mortgage loans as collateral, IMBs tend to get acquired by banks or insurers rather than the other way around.
For example, when IMBs argue that they should be admitted as members of the Federal Home Loan Banks, two of the five provisions of
Ironically, the first members of the FHLBs were nonbanks, thrift institutions that were chartered under state law and had limited capital and deposits. Insurance companies were also allowed to be FHLB members. State-chartered banks were involved in residential mortgages to a limited degree, but national banks were prohibited from lending on real estate at all until the 1960s.
Through the S&L crisis of the 1980s and the subsequent market contraction in the 1990s, obtaining a residential mortgage was extremely difficult and then usually involved a government guaranteed loan. By the early 2000s, however, thrifts and near-banks like Countrywide Financial and Washington Mutual began to grow rapidly, but continued to rely upon wholesale funding.
After the 2008 financial crisis, IMBs began to expand into residential mortgage lending, filing a void left by the collapse of the remaining thrift institutions and the GSEs, and the exit of many commercial banks. The origins of the leading IMBs in the market today all date back to this period, when IMBs focused on the Ginnie Mae market and continued to rely upon bank financing and the bond market for working capital.
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Among nonbank firms, life insurance companies have been directly involved in residential lending for decades because mortgage loans pair nicely with life insurance and annuities.
Favorable risk-based capital treatment by the National Association of Insurance Commissioners (NAIC) makes residential mortgages attractive investments for backing long-term policyholder liabilities.
One prominent example was MetLife, which entered residential lending in 2008 by creating MetLife Home Loans and for a time owned a bank. After winning an extended litigation with the Financial Stability Oversight Council, MetLife decided to exit the retail residential and forward mortgage business around 2012.
Another insurer, Athene, created a new mortgage lender in partnership with Apollo Management (APO) in 2013 called AmeriHome. After growing the firm into one of the largest correspondent lenders in the US, Apollo
That same year, Athene
But some IMBs have acquired banks. In 2022, Cornerstone Home Lending acquired and
For mortgage lenders with strong operations, a servicing portfolio and positive net assets, acquiring a depository or an insurer is a way to diversify funding sources and start to build permanent equity capital. While banks enable the IMB to retain escrow deposits, an insurer can offer significant benefits to an IMB and provides the carrier with a stable flow of new assets.
By having a bank or insurer as the affiliate of a mortgage lender, the IMB picks up a dedicated takeout for new loans, arm's length warehouse lending and also access to the federal home loan banks.
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A liquid, well capitalized bank or insurer can also help to improve the credit rating for the group, from a B/BB range for smaller monoline lenders to investment grade for a diversified group. Athene's insurance unit has an A+ rating from AM Best and S&P, giving all of their business units significant uplift.
For this writer, the greater flexibility and financial leverage definitely comes with an insurer over a bank. The regulatory environment is far more positive. Carriers that follow the rules on capital and asset quality enjoy big benefits. Unlike some private credit managers, you don't have to cheat to make handsome capital gains with an insurer.
A well-capitalized insurer or bank, for example, adds to the financial strength and liquidity of the lender, one reason that GSE and Ginnie Mae capital rules do not apply to FDIC insured depositories (or large publicly rated insurers in practical terms).
For example, Athene merged with Apollo Management in January 2022, creating a unified asset management and insurance vehicle with a high investment grade rating. After Wells Fargo and Truist, Apollo is the largest FHLB borrower at $32 billion and has a $56 billion portfolio of residential loans.
But the ultimate model for insurers and mortgage lending is Warren Buffett, with AA rated Berkshire Hathaway and GenRe, GEICO and several other specialty insurers.
