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Yellen from the US Treasury says Congress should address the non-bank mortgage sector

(Adds context in paragraphs 4-5 and 10-13)

May 10 (Reuters) – U.S. Treasury Secretary Janet Yellen on Friday called on Congress to give regulators more power to oversee the burgeoning non-bank mortgage industry, which she says poses unique risks to financial stability.

Yellen spoke during a meeting of the Financial Stability Oversight Council, the regulatory body she chairs that was established after the 2007-2009 financial crisis. Its task is to manage risks for the financial system.

The council, whose members lead other leading financial regulators, voted unanimously to publish the report and related recommendations on the matter.

ANGLE

Regulators are trying to cover up the gap in their powers to reduce risk in the mortgage market, which now constitutes a large and growing majority.

The proposal introduced Friday recommends that Congress create an industry-financed fund to provide liquidity to non-bank mortgage service providers, solving a problem highlighted by the industry at the beginning of the Covid-19 pandemic.

KEY QUOTE

“Put simply, the vulnerability of non-bank mortgage companies could amplify mortgage market shocks and undermine financial stability,” Yellen said in prepared remarks.

“We need further action to promote safe and sound operations, eliminate liquidity risk and promote continuity of service operations when a servicer cannot perform its critical functions.”

CONTEXT

While they offer some advantages over traditional lenders, Yellen said, non-bank institutions also pose unique challenges.

Non-bank institutions may have high leverage, short-term financing and be more exposed than banks to fluctuations in the value of mortgage servicing rights and housing prices, as well as changes in interest rates and debt arrears, she added.

Failures by nonbanks could hurt borrowers and force the federal government to take over servicing responsibilities, and greater disruption in the sector could reduce mortgage lending, Yellen said.

She said the FSOC report recommends, among other things, that state regulators tighten prudential standards and that Congress consider legislation to facilitate coordination among regulators and give greater authority to the Federal Housing Finance Authority and the National Government Mortgage Association, or Ginnie Mae. (Reporting by Douglas Gillison; Editing by Jonathan Oatis)

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