How big is the mortgage mess? No one knows

updated 4:09 p.m. ET Aug. 28, 2007

WASHINGTON - It’s hard to know how scared to be if you don’t know the size of the threat. No, not terrorism, housing.

The U.S. mortgage-lending business is a sprawling, varied enterprise that no one regulator oversees, making it impossible to know how many mortgages or lenders not insured by the government are in trouble.

Even worse, no public records are available to show who holds the trillions of dollars worth of mortgages that investment banks pooled and sold as securities to investors around the globe. The value of many of those securities plunge as mortgage defaults soar.  

“You can’t get your arms around the size of the problem. ... I don’t think that anybody knows that number,” said David Jones, president of Denver-based consulting firm DMJ Advisors and a former Federal Reserve economist.

About 90,000 nonbank mortgage lenders dotted the landscape last fall, when state regulators conducted their first formal survey. Dozens of bankruptcies and closings in recent months have likely whittled that number, and 25,000 workers lost jobs in August, aggravating worries about the downturn’s impact on the economy.

Large numbers of the nonbank companies were based in California (around 4,100) and Florida (12,900), states where the real estate boom was especially heated, and now on the downswing, among those posting the highest number of foreclosures.

States license 90,000 or so “nonbank” companies, which include brokerages that lend on behalf of other mortgage companies. Relatively few nonbank lenders, such as Countrywide Financial Corp., the nation’s largest mortgage lender, are publicly traded and required to disclose financials regularly.

For a number of reasons, including a lack of resources, the activities of nonbank lenders are not scrutinized the way federal regulators oversee insured institutions, such as commercial banks or savings and loans. That means state regulators generally don’t release detailed reports about the lenders’ financials.

Other indications of how massive the mortgage lending universe is and how difficult it is for regulators to track include:

• In addition to the 90,000 licensed nonbank firms, there are some 63,000 branches scattered nationwide, according to the 2006 survey by the Conference of State Bank Supervisors.
• The survey also tallied 280,000 loan officers at these companies although 13 states and the District of Columbia don’t license loan officers, so the total number was much higher. The states are Alabama, Arizona, Delaware, Georgia, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, North Dakota, Pennsylvania, Virginia and Wyoming, and some of them are moving toward requiring officer licensing.

Experts say making forecasts about the length and depth of the housing market slump is possible by tracking changes in interest rates, home sales, foreclosures and other indicators. Yet not having specifics on how many mortgages or nonbank lenders are getting squeezed has potentially damaging ramifications for investors and policy-makers.

Over the past five years at least, state-licensed lenders made 70 percent of mortgages issued annually — totaling $2.8 trillion in 2006.

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