A report from Bloomberg. “Financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market. Behind the concern aired recently at the Financial Stability Oversight Council headed by Secretary Mnuchin: the rapid growth of so-called shadow banks in the origination and servicing of home loans, especially riskier ones.”

“‘There is a real weakness here,’ said University of California, Berkeley professor Nancy Wallace, who co-wrote a 2018 paper titled ‘Liquidity Crises in the Mortgage Market’ with a fellow academic and three Fed economists. ‘Many of these firms are financially fragile.’”

“That’s because they’re dependent on short-term bank credit lines that could be pulled at times of financial stress. The worry is that could end up hurting the housing market and the economy as the financiers are forced to cut back or curtail their mortgage business.”

“As conventional banks pulled back from the mortgage market due to limited profit opportunities and increased regulation after the financial crisis, the independent mortgage companies flooded in. They currently originate around 70% of agency-supported residential home mortgages and about 90% of the riskier loans backed by the Government National Mortgage Association, or Ginnie Mae. Six of the top ten originators of home mortgages in 2018 were independent mortgage lenders, with Quicken Loans Inc. as No. 1.”

“Unlike conventional banks, the independent mortgage companies are generally monoline operations, dependent on one business to make money. Of the dozen or so evaluated by Moody’s none have an investment-grade rating on their debt. They’re not regulated by the Fed or the Federal Deposit Insurance Corp. And they lack the deposit base and access to emergency Fed financing that commercial banks enjoy.”

“In originating loans, the nonbanks depend on credit lines to fund the mortgage until it is sold. They also rely on short-term financing to cover their obligations as loan servicers when borrowers fall behind on their payments.”

“‘Our greatest focus right now is on liquidity,’ said Chuck Cross, a senior vice president at the Conference of State Bank Supervisors, one of the groups that presented at the FSOC. ‘That short-term debt is tenuous and can disappear at the moment it is needed most.’”

“The credit lines are subject to cancellation or revision if the mortgage companies violate any of the contracts’ covenants, including being profitable in at least one of the two most recent quarters. Many were in breach of their covenants last year when a slump in mortgage refinancing helped push them into the red, said Warren Kornfeld, a senior vice president at Moody’s Investors Service.”

“But they were able to obtain waivers from their lenders and maintain the lines, given the overall strength of the economy. That won’t be so easy though if the outlook is more uncertain, Kornfeld said.”

“Kornfeld doubted that conventional banks would rush to fill the void if the nondepository lenders exited the mortgage market. ‘The banks will be cautious about stepping back in,’ he said. ‘That will have an overall ripple effect on the economy.’”

From Crain’s New York Business. “While sales activity continues to slow down, the month of September saw more price drops across neighborhoods compared to the month prior, according to a recent report by RealtyHop. Manhattan saw the highest number of price drops with five of its neighborhoods making the list of neighborhoods with the highest number of price drops. Turtle Bay-East Midtown came in at the top with a total of 245 price drops, an increase of 19% compared to last month when it had 206 price drops.”

“Rounding up the top five neighborhoods with the highest number of price drops are Upper East Side-Carnegie Hill with 225 price drops, Hudson Yards-Chelsea-Flatiron-Union Square with 161, the Upper West Side with 150, and the West Village with 140.”

“Although Manhattan was dominant among the neighborhoods with the highest number of price drops, Queens, the Bronx, and Brooklyn saw the highest median percentage price drops. The Queensbridge-Ravenswood-Long Island City areas saw a median price drop of 21.1%, while Morrisania-Melrose in the Bronx saw a median price drop of 17.9%.”

“Three neighborhoods in Brooklyn rounded up the neighborhoods with the highest median percentage price drops including Starrett City at 11.1%, Rugby-Remsen Village at 8.4%, and Brownsville at 8%.”

The Los Angeles Times in California. “One of the most pedigreed estates on the L.A. market just got a tad cheaper. ‘American Idol’ creator Simon Fuller has trimmed the price of his lavish Bel-Air mansion to $32.5 million, down $2.5 million from his original asking price.”