Nonbank Lenders: The New Risk in the U.S. Mortgage Industry


The US housing market in the past 10 years has been characterized by unusually long-lasting low interest rates and robust government-backed mortgage programs. These market conditions have allowed nonbank lenders to boom in the last decade. In 2018 there are several proposals brought forth by regulators looking to agree on a final housing finance reform solution – the single largest piece of unfinished business 10 years after the housing crisis. The problem with these proposals is that they put too much emphasis on traditional lenders such as banks and depository institutions, and not enough on the new risk-takers of the U.S. economy: non-bank lenders.

In the aftermath of the 2008 crisis, regulators and lawmakers implemented a myriad of regulations on banks’ lending practices, in an effort to prevent toxic mortgages. As a result, over the past decade most banks decided to either completely exit the mortgage lending business, or severely limit their mortgage lending to only the worthiest borrowers with stellar credit. This created a very large gap in the lending market. Enter the nonbank lenders.

These nonbanks are usually private institutions that offer limited transparency into their lending activities, and don’t fall under the same regulations as banks. Nonbanks are regulated by state financials regulators such as the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators. However, these organizations have not yet established uniform data and reporting standards – it is very much a work in progress. Thus, for the time being, nonbanks have the liberty to provide mortgages to less financially-qualified borrowers without much oversight.

As a result, in 2016, these nonbank lenders originated over half (53%) of all mortgages in the US. However, that 53% is mostly made-up of mortgage borrowers with lower credit scores. Most non-bank borrowers have less income/wealth, are less likely to have college degrees and are more likely to be minorities. They include 85% of all FHA borrowers, 64% of all black and Hispanic borrowers, and 58% of all low-to-moderate income borrowers. These groups tend to require loans with smaller down payments and have less inherited wealth to depend on in case of an economic downturn. The risk of defaulting on their payments is considerably higher.

While these nonbank lenders are filling in the funding gap and provide financing to a very large demographic that is not being serviced by the traditional lenders, they are exposing themselves and the lending industry to huge risks.

Unlike traditional banks, which handled all three main mortgage functions (origination, servicing and funding), nonbanks only handle the origination and servicing part, while using borrowed funds from banks. Nonbank mortgage lenders depend on credit to finance their origination costs and costs of mortgages in default. Most nonbanks are required to continue making payments to investors, insurers and tax authorities even when their borrowers skip or default on their payments. Also, nonbanks’ creditors – the warehouse lenders – can decide to pull or renegotiate their lines of credit, leaving nonbanks illiquid. Declines in house prices, a rise in mortgage defaults, or sustained rises in long-term interest rates, could each prove fatal to the nonbank lending companies. These multiple points of failure make it a very risky business.

While taking most of the risk, unlike banks, non-bank lenders have extremely limited resources available to survive an economic downturn. Only six percent of their assets are cash, while seventy percent of the nonbanks’ assets are mortgages held for sale. This means that they are used as collateral for their lines of credit and cannot be used by the company to cover any losses. To make matters worse, as of end of 2017, eighty-three percent of nonbanks’ debt was in lines of credit with maturities of less than a year. When that year is over, there is a high risk the interest rates will increase. Without the resources available to banks, such as the Federal Reserve and the Federal Home Loan Banks, nonbanks have no liquidity backstop – absolutely no safety net – in the event of an economic downturn. This could prove catastrophic to the U.S. economy.

The Housing Reform Act is currently underway but most of the rules and regulations proposed are focused on the traditional bank lenders and GSEs, while all but ignoring the rapid rise of nonbank lending and the risks that come with it. If nonbanks were to fail, the U.S. government (taxpayers) would still have to financially cover the losses through FHA, VA, GSEs or Ginnie Mae. From our perspective as taxpayers, it would be a similar situation as the 2008 crisis, but instead of bailing out banks, we would have to bail out nonbanks. We cannot let this happen.

The regulators must take a more active role to address the regulations of the nonbank lending sector, similar to the traditional banking regulatory framework. Regulators must find a way to either limit the nonbank’s sector exposure to risk, or ensure nonbanks secure the resources necessary to sustain themselves in an economic downturn, or a combination of both. Regulators must finalize the state prudential minimums for nonbanks. In addition to net worth, capital and liquidity requirements, this new regulation must consider all factors that determine the nonbanks’ risk, such as maturity and capacity of their debt facilities, business model, and their hedging strategies. To do so, regulators must immediately address and correct the lack of access to data (nonbanks are mostly private) and the lack of staff and resources dedicated to the regulation of nonbanks. They pose an enormous risk on the U.S. economy – comparable to that of the 2008 mortgage crisis – and thus, must be treated accordingly.


Forbes: Banks Are Not Lending Like They Should

Federal Reserve: The Decline in Lending to Lower Income Borrowers by the Biggest Banks

Brookings Institute: Mapping the Boom in the Nonbank Mortgage Lending


Regulating Social Media – Yeah or Nay



How safe do you feel on social media? On the one side, we have huge proponents of social media saying that it should remain unregulated so people can practice their freedom of speech, engage in meaningful conversations, and share opinions. On the other side, there are people who support its regulation claiming that it has become a public menace.

And from a user’s standpoint, it does seem important to be able to share and express yourself freely. However, the recent social media scandals, such as the Cambridge Analytica, banning Alex Jones from social media, spreading fake news, hate speech, and the fact that terrorists use it for recruitment shows us the other side of the coin.

Is social media coarsening public discourse and lowering the quality of journalism? It definitely does.

Social Media Censorship

Is social media censoring us and how? For example, this analysis shows how Google systematically stifled the content by the author Doug Wead from being available in Google search results and on YouTube. Last year, Media Matters issued a memo explaining how social media platforms can collude to eradicate what they feel to be “fake news” or “right-wing propaganda.”

Social media platforms are increasingly accused that the Silicon Valley elite is excluding other people’s views, and these recent scandals show how vulnerable our democratic society can be to the power of social media. Many of us treat them as a part of our daily lives, where we connect, communicate, and share our values and opinions.

Do Tech Companies Consort to Evil for Profit?

In March 2018, Washington Post published an article to remind the public about the relationship between the IBM and Nazi regime. Namely, Thomas J. Watson (IBM president) returned the medal he received from Adolf Hitler himself because the Fuhrer started a war, which was “contrary to the cause which he has been working and for which he received the decoration.” However, he didn’t say that he will terminate the relationship, and actually continued to do business with the Nazi regime.

Mark Zuckerberg resorted to the same type of “ignorance.” Leaving Facebook and Twitter to self-regulate their platforms is dangerous, but should we cede power over private companies to the government? In the digital space, we may sacrifice our liberty by doing that.

Two Dark Sides of Social Media

With no regulatory supervision, companies such as Google and Facebook use techniques common in casino gambling and propaganda (such as rewards and constant notification) to foster psychological addiction. The other side is geopolitical, where social platforms are used to inflict harm on the powerless in commerce, foreign policy, and politics. They can be exploited to undermine democracy.

Saying that the government should regulate social media as alcohol or tobacco may be too harsh, but the fact that private individuals and companies control the flow of information and saturate their platforms with the information they want can be considered as another form of media manipulation and manipulation of an enormous part of the human population. Yes, it is a valuable tool for spreading the right information and the truth, but the truth can easily be lost in a sea of irrelevant news.

We need more than just self-regulation, but content disclaimers and verification systems. We need social media to give liberty to the people and not be used as a weapon that is not held accountable to legal standards. However, we are left to see what will be the rules, and the proponents and opponents need to find common ground.

The Financial Policy Council is there to inform the public about all current fiscal and economic matters. Whatever social media regulations might be introduced in the future, we are here to inform, educate, empower with our accurate research on key policy issues.


The Systemic FinTech Revolution


Fiscal 2018 has been a momentous year for US financial technology (FinTech) organizations. On July 31, 2018, the Office of the Comptroller of the Currency (OCC) began the process of accepting applications from non-depository FinTech companies for a special purpose national bank charter. Such action has been spurred by the Trump administration’s call for a regulatory climate that supports financial technology and innovation, mandated by the US Treasury Department under Executive Order 13772. The OCC’s special purpose charter allows FinTech Companies to have nationwide operations as opposed to needing state-by-state licensing per transactions. FinTech companies that qualify cannot obtain FDIC deposit insurance, as the most glaring requirement revolves around the non depository nature of all FinTech banking transactions.

All FinTech companies under this umbrella may participate in lending services and facilitating payments without any need to partner with traditional banks. Financial policy under the National Bank Act will now govern FinTech companies that fall under his new banking status. Specifically, reporting requirements which pertain to the Dodd-Frank Act, “CAMELS” supervision and all legal lending limits now count for FinTech companies. Such inclusion of FinTech into mainstream banking compliance marks an important turning point in our financial system, one where we finally recognize FinTech as a systemically important financial entity that is rapidly changing the fabric of both microeconomic lending and macroeconomic advancement.

Professor Saule T. Omarova of Cornell Law School (CLS) has delineated concrete insight into impacts of FinTech’s systemic importance. Financial experts, governments and policymakers have only recognized the longevity of financial technology in the last five years. For most, early FinTech was considered purely disruptive in a democratizing fashion: providing unorthodox financial solutions to outlier demographics such as lending to less wealthy demographics, or providing currency alternatives to speculative renegade traders. However, the advent of Blockchain technology’s wide reach into countless industries has propelled FinTech as innovative, stabilizing and fostering of long term growth. Policymakers are now realizing that disruptive does not mean destabilizing!

Omarova’s CLS whitepaper “New Tech v. New Deal: Fintech As A Systemic Phenomenon” makes the point to not trivialize the impact which FinTech has on the financial system. As stated, FinTech’s systemic and vastly growing influence on the structure and velocity of global payments cannot be ignored. According to Omarova, global financial policymakers have thus far treated the issues that challenge FinTech – cybersecurity, regulatory governance, legal obscurity, transactional accountability – as natural glitches to be naturally worked out in the private market. However, as Omarova so rightly says “money and power are two sides of the same coin…Finance is, and always will be, a matter of utmost and direct public policy significance.” FinTech commands systemic power, and it is best to include FinTech players in the wider audience of finance. Long standing behemoths such as Goldman Sachs have been savvy in the adoption of financial technologies such as bitcoin derivatives trading. Institutions such as the OCC must recognize the same.

Debevoise & Plimpton LLP via the Columbia Law School Blue Sky Blog examined further changes to the US regulatory framework, recommended by the US Department of Treasury, which will aid further financial technology innovation in the mainstream financial system. These are as follows:

  • The creation of a FinTech Industry Advisory Panel comprising both state and federal agencies to pilot regulatory sandboxes for early stage FinTech companies. Regulatory sandboxes are common in the United Kingdom, and allows regulators practical insight into growing financial technology.
  • Marketplace Lending, where banks will be fully identified as the official lender of loans originated, even if these loans are sold to multiple third parties. In this manner, financial accountability is easily identified.
  • Clarity in regards to the Federal Reserve Board’s definition of “control” within the Bank Holding Company (BHC) Act. Specifically, the definition must clarify and support BHC permissible investment activities in financial technology.
  • Third-Party Oversight, where compliance checks along the bank supply chain has led to an over abundance of costs. There needs to be blanket standardization of such costs.
  • Regulators need to provide more consistent and facilitating rules pertaining to credit modeling and data without impeding accuracy and privacy.
  • The standardization and flexibility of payments and transmitter requirements are uppermost to ensure systemic flow within the financial system under FinTech, as financial technology continues to capture a huge bulk of the payments sector.

These recommendations from the US Department of Treasury come under the auspices of Executive Order 13772, and support US financial system growth and innovation. State and Federal policymakers must continue to harmonize regulatory framework to harness the systemic power of US financial technology.



What Does It Take to Be a BIG Disruptor?



Today, almost every new technology is being called “disruptive,” and it’s mostly because that specific word has been overused for so long. It became a cliché, but there are situations where it fits perfectly. Some revolutionary companies, like Aereo (the television streaming company) and Uber (the ride-sharing app,) have entered the market and used their potential to disrupt the way their industry operates.

These innovations are known as the “big bang disruptors” and were evident in hypercompetitive markets, such as computing, gaming, and electronics. However, they have moved into other industries as well, and now there isn’t an industry that hasn’t experienced an enormous transformation due to these big bang disruptors.

Have you asked yourself what does it take to be a significant disruptor? Here is what you should know about it.

  1. Listen to Visionaries

Who should we consider a visionary? Anyone from your employees who have decided to move from one to another successful startup because they see a more promising future, to industry thought leaders like Elon Musk or Steve Jobs, who are persistent in chasing the dream of the future. They are the truth-tellers because their lives depend on it, and they can show us things that are not so obvious. And besides the truth-telling people, future market demand can be indicated by crowdfunding campaigns and today’s enormous data sets.

  1. Experiment

The most innovative products used to be developed by the companies with the most robust R&D (Research and Development) departments. Today, small tests can be conducted without enormous budgets. Experiments with the potential to grow into disruptive ideas. The risk and cost of experimenting are getting low.

  1. It’s Also about Timing

No, it’s not a matter of luck because luck plays such a small role. Take Amazon’s Kindle for example. Jeff Bezos has decided to avoid all the problems that other e-readers were encountering with the technology, waiting for it to mature. When it hit the market, it wasn’t the first e-reader out there, but it was the best. That’s how the timing was crucial to the success of a big bang disruptor.

  1. Handling the Quick Scaling

Once a disruptive product enters the market, it creates an enormous demand. However, such quick success comes as a challenge because you need to be prepared (logistically) for fast business growth. Consider finding partners or outsource ahead of time to get help when needed.

  1. Stay Competitive

Once you make a disruption, new iancumbents will start flowing into the market, trying to get their piece of the cake. Every product has a saturation point – when the user base peaks and then continue to fall. Give your best to anticipate your product’s saturation point.

  1. Think What You Can Do Next

At one point, things will start slowing down, but you will be prepared. Plan your next move before the fire starts dying down and sell your assets before they turn into liabilities. Use your money to develop the next product or start reducing your expenses early on. Don’t use all your resources to that one breakthrough product.

In the beginning, you were a disruptor. Later, you will also become susceptible to disruption. Anticipate threats to stay alive, and realize that you’re being slowed down by your product that was once a disruptive innovation. Quit while you’re ahead and avoid ending up spending vast chunks of your profits trying to save an industry in decline.

For a peek into the future and getting a clue about emerging industries and markets where you may enter as a disruptive entrepreneur, there is the Financial Policy Council. To us, America is the land of opportunity, and we want to inform, educate, and empower entrepreneurs by helping them understand, support, and recognize the issues and opportunities of their concern.

Come join us and be part of decisions that will shape the country’s future and the world.

August 4, 2018


Crude Oil Price Cycle – The Stealthy Economy Killer


In this blog I want to give you a look into a very dangerous, stealthy and disruptive cycle, which is the deep tap root cause of the US 2008 housing crisis. The crude oil price cycle was followed in lock step by the 2008 financial and economic collapse of the U.S. and the world.

In 1992 I started a project that I completed in late 2012 and tested in 2013: Geometric Percent Fractals. However, in 1995, while working on this project I made an accidental discovery which resulted in a side project of several hundred hours to document the “spot cash” crude oil prices back to 1902. I hand assimilated monthly charts of oil prices up to 1968-69, then created digital charts up to 1996. This resulted in a staggering revelation.


From 1910-20 there was a gentle price jump, then the price was relatively steady from 1920-40. From 1940 to 1950 the price of crude oil spiked by 350% to just under $4.00.

From 1950-1970 the price again held steady between $3.50-4.00 and then from 1970-1980 the price spiked again by approximately 350%, to just under $30.00.

From 1980-2000 prices held steady between $10.00-20.00 (only exception was the Gulf War scare spike), and then again, the price spiked to $80 by 2006. By 2007, crude oil prices were just under $100.00.

The $100 crude oil price began to cause severe stress in our economy, specifically on all transportation-related industries, and the monthly housing market was declining. I was holding my breath. I was thinking of all the real possibilities which were mostly catastrophic.

With the economy in full decline, the crude oil price remained steady in the last quarter of 2007; however, by 2008 crude oil spiked again for almost 6 months straight, peaking at $147.3. The metastasizing effect of the crude oil price was dragging the CRB index up lock-step with it. Crude oil prices touch all items in our economy from birth to death – all our world’s consumables. Why did the crude oil price spike with such intent while the world’s economics were tumbling in downward spiral?

It is because it was absorbing the devaluation of the USD. This is specifically what makes the crude oil cycle so unmerciful! It is not responding to normal supply-demand factors. Also, it will not respond to any Federal Reserve action, period.

Crude oil is the strongest hard asset currently on the globe, with gold following a very close second. It appears the devaluation of USD is not a smooth transition. As crude oil absorbs the USD’s devaluation built up over the previous 2 decades, it manifests itself as a quick and violent event. After crude oil had satisfied its target and collapsed during the last two quarters of 2008, gold immediately spiked up from $850.00 and marched steadily up to $1900.00 area. It finished absorbing USD’s devaluation, which crude oil expelled as it fell in price.


The issue is that these drastic crude oil price increases that take place every 30 years, caused the 2008 crisis in a very direct (yet silent) way. In 2007, daily consumption of gasoline use in the US was approximately 391,000,000 gallons. From 2000 to 2007 the price per gallon increased by an average of $1.50. This resulted in an increase of $586,000,000.00 “per day” for gasoline. If you multiply this expense by 30 days in a month, you get a staggering monthly expense – an enormous pressure on an already tight and strained family budget.

Families chose to spend their money on transportation to go to work, maintain their money flow and provide for their family. This decision meant there wasn’t enough money to pay for their mortgage, which caused the housing payment defaults, which triggered the crisis.

It was a tragedy. Unfortunately, the biggest issue is yet to come: if the crude oil cycle continues with this historical and documented pattern (and there is no reason to think otherwise), I estimate that between 2030-2040, the crude oil price will reach at least $400-$500, with a possibility of peaking at $600-$700!

If the US (and world) economy barely survived a $147.3 crude oil price, how will it survive a $600 price crude oil price? Such a spike would resemble an enormous tax increase – a huge sum of money extracted from our economy, from our pockets, on a monthly basis. It would be a financial Armageddon.


We need to begin relying on battery-powered cars and buses in our cities, as well as battery-powered 18-wheelers trucks for food and cargo transportation.

Also, hydrogen-assisted combustion engines can greatly increase the fuel mileage and reduce emissions. This increased fuel mileage would lessen the impact to higher gasoline/diesel prices. Hydrogen fuel cells are totally segregated from crude oil, and are an excellent alternative.


The natural gas price does not appear to be as reactive to the crude oil price expansion and does not have strong sympathy trade with crude oil.

A California company named Siluria Technologies has a patented catalytic process which can use natural gas to produce gasoline. These scalable plants can be scattered across the globe to convertnatural gas into white crude oil or directly into fuels. This fuel will work in all current transportation including jet engines, diesel engines and gasoline without any alterations. It actually works better than black crude oil fuels as it is ash-free, which greatly decreases maintenance as well as potential repairs.

Siluria Technologies claims the ability to produce gasoline priced at $1.00 (in August 2014). This is stunning claim. Why are we not hearing about this? Why is this technology not being pursued? When Crude oil starts to explode in price after 2030, we don’t have time to create these fuels. It takes years to create fuels from these plants. We must begin now.

These solutions (natural gas to gasoline, diesel and jet fuels plants), which are scalable and strategically scattered around the globe, could literally knock the legs out from under our next crude oil price expansion.

I fully believe our growing crushing world government debt is the deep tap root for this unnatural crude oil price expansion! What are the odds of our political leaders fixing this growing debt? If my thoughts are correct, this next crude oil price expansion will prove unmerciful and the world will be unable to recover. If we do nothing, the world will in be in total financial collapse.