Still Lurking in the Shadows: A Look at Home Mortgages and Shadow Banking.

Real Estate Law

Since the mortgage crisis, everyone has become more aware of the risks and irregularities involved in home funding and banking. One such risk that the mortgage and foreclosure crisis highlighted is that of “shadow banking.”

Shadow Banking

Generally, a “shadow bank” is any unregulated financial institution that acts like a bank. Unlike a bank, however, a “shadow bank” gets its finances through investors, borrowing, or creating financial products, instead of obtaining its financing through deposits.

Shadow banking includes:

  • money market funds,
  • private equity funds
  • hedge funds,
  • securitization,
  • securities lenders,
  • and other structured investment vehicles.

Shadow banks, like traditional banks, provide credit and liquidity for their customers. Unlike traditional banks, however, shadow banks do not have access to central bank funding or safety nets, like deposit insurance.

In the days, years, and months leading up to the financial crisis, both government-sponsored entities (i.e., Freddie Mac and Fannie Mae) and commercial banks were very active in the unregulated lending arena. Many of these businesses still participate in shadow activities. Indeed, at least one 2013 estimate put traditional banks’ share of the shadow sector at 22%.

Shadow banks frequently invest in long-term loans like mortgages. Often, shadow banks will provide credit across the spectrum of the financial system. They do this by matching investors and borrowers individually or by becoming part of a chain involving numerous entities, some of which may be mainstream banks.

Unfortunately, shadow banking still poses risks to borrowers and investors. So why, if that is true, do they remain unregulated? Perhaps because despite the dangers unregulated lending poses for consumers, banking regulations can slow economic growth.

Real Estate Counsel in Georgia.

Since 2001, the attorneys at the Law Offices of Mark Weinstein, P.C., have been helping people in the state of Georgia to protect their real property interests. If you have a real estate issue, call us. We serve clients in Atlanta, and in a number of counties throughout Georgia, including: Clayton County, Cobb County, Dekalb County, Douglas County, Fulton County, and Paulding County, among others.  Give us a call at: 770-888-7707. Or you can contact us here.

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