Protect small lenders in GSE reform

This week, the Senate Banking Committee held hearings this week on an outline for GSE legislation proposed by Committee Chairman Mike Crapo (R-Idaho).

Crapo is to be commended for continuing the congressional debate on GSE reform. CHLA is especially appreciative that the bill appears to extend the parity requirement to cover not just the federal guarantee fee but also fees by guarantors. The bill would also codify important reforms accomplished administratively to date, such as risk sharing and limiting portfolios.

{mosads}However, CHLA has serious concerns about two key provisions from the outline: the authorization of additional guarantors and running the entire GSE market through Ginnie Mae.  

The concept of multiple guarantors is overwhelmingly opposed by community mortgage lender groups who see more risk to consumer access and affordability than benefit.  Six associations representing community banks, credit unions and smaller independent mortgage bankers (including CHLA) testified before a July 2017 Senate Banking Committee hearing on GSE reform – and all six unequivocally opposed multiple guarantors.

Proponents of multiple guarantors argue it will bring more competition that is beneficial to consumers. Yet, it was unrestrained competition in the subprime era that led Fannie and Freddie to drop their underwriting standards, which led to their downfall.   

CHLA believes in competition, but does not believe an oligopoly achieves any more competition than the current duopoly, or any suggested benefits will trickle down to consumers. 

In fact, more guarantors could actually decrease competition in mortgage loan origination.  For decades, the largest Wall Street banks have coveted the opportunity to gain control over a GSE charter – seeking to achieve vertical integration, where a loan originator has exclusive access to or preferential arrangements with a guarantor. 

The committee bill outline narrowly limits ownership by an FDIC-insured bank.  However, this would not address ownership or control of the guarantor arising from other types of relationships between a bank holding company, investment bank, or other investors, and it is unlikely any legislative provisions can prevent vertical integration when the benefits of achieving it are so high.

CHLA also has concerns about the competitiveness of the proposed cash window, which has provided community lenders access to secondary markets on comparable terms to larger lenders over the last decade. New guarantors will likely target loans and consumers with characteristics valued more by the MBS investing market. As no guarantor will be required to establish a cash window for all currently approved seller-servicers and cash window pricing may be inferior to direct securitization, small community lenders will not be able to offer the most competitive pricing with local servicing of the loans to its consumers. 

Our second concern is turning the entire GSE market over to Ginnie Mae.  As a practical matter: (1) Ginnie is in a transformation not expected to be completed until 2020, (2) it is not clear how Ginnie has the capacity to supervise this new huge market, and (3) there is no discussion of the transitional risks associated with this change.  Last December, I raised initial concern with this concept on behalf of the Community Home Lenders Association (CHLA) at a House Financial Services Committee hearing. 

A month later, CHLA issued a comprehensive report detailing concerns about Ginnie Mae’s heightened scrutiny of smaller community lenders, predicting a contraction in the number of small community issuers. Ginnie operation of the GSE market will reduce access to local credit providers in many communities. Notably, there are roughly four times as many approved Fannie/Freddie seller-servicers today as there are approved Ginnie Mae issuers.

CHLA believes there is a simpler path to completing GSE reform than a complicated legislative proposal that introduces significant new transitional risk. Almost all the necessary major reforms to Fannie and Freddie have been done except retaining capital. FHFA should allow Fannie and Freddie to retain capital, complete its Capital Rule, and use its authority under HERA to require Fannie and Freddie to develop capital restoration plans, so progress can continue.

Then, working with the detailed input from the Treasury and FHFA, Congress should take the necessary steps to complete the job – culminating in Fannie and Freddie exiting conservatorship and Congress adopting necessary legislation (a federal guarantee and a Fund)  to finish the job and codifying existing reforms (pricing parity, required risk sharing, and strict limits on portfolios).

Don Calcaterra, Jr. is Vice President of the Community Home Lenders Association (CHLA) and President of Local Lending Group LLC, based in Troy, Mich.