Small Banks Press Lawmakers to Preserve Their Access to Housing Finance

WASHINGTON — The Senate Banking Committee dug into the details Tuesday of how a reformed housing finance system can ensure access to community banks, as agreement over a broad approach is beginning to emerge.

Industry representatives largely praised a proposal by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., to overhaul Fannie Mae and Freddie Mac and set up a new secondary market that would also provide for the participation of smaller institutions through an expanded Federal Home Loan Bank system and other means.

Several bankers hailed their bill's call for a mutual securitization cooperative, though questions remain about how it should be built and operated.

"The structure is important and representation is equally important," said William Loving, president and chief executive of Pendleton Community Bank in West Virginia, and chairman of Independent Community Bankers of America. "As the mutual is designed, I think representation of community banks, such as the community bank council that is in existence at other agencies, as well as governance of the mutual is important, so that there is a voice of community banks in the formation and the operation of the mutual for itself."

Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel's top Republican, are working on their own legislation, but are likely to rely heavily on the Corker-Warner plan.

Some bankers are already pushing for changes to the plan. During the hearing, some panelists said lawmakers should raise or eliminate a cap in the Corker-Warner plan that would limit access to the mutual to institutions with less than $15 billion of assets. They argued that such a restriction could hurt the mutual's ability to generate sufficient volume and build economies of scale.

"We're probably more of a proponent of a wide open mutual membership from all sizes, and it really goes down to the capital equation, to make sure we don't limit our size or limit the scaling opportunities of the mutual," said Jeff Plagge, president and chief executive of Northwest Financial Corp. in Iowa, and chairman of the American Bankers Association. "So rather than create a mutual for small banks only, open it up further and let others become part of that."

Bill Hampel, a senior vice president and chief economist for the Credit Union National Association, agreed, noting that if the mutual is structured correctly, participation by larger institutions shouldn't be a hindrance.

"We think if you provide smaller lenders the opportunity to pool their resources to create a utility large enough to meet their needs, then it wouldn't really be necessary to restrict the size of any other players," he said.

Still, Loving offered that it could be important to set some boundaries, suggesting issuers be held to a 15% cap on total outstanding securities as a way to reduce concentration concerns by the biggest institutions.

"We think it's important for there to be an opportunity to participate, but at the same time we want to cap that level of participation so that there's somewhat of an equal or level playing field in the industry," he said.

Witnesses also urged lawmakers to consider more closely the transition to any new system, providing time to establish the mutual and build it up — concerns that Corker agreed are well founded.

"The transition, I agree, we need to add some meat to that, although I think giving the [new regulator's] director and others a little bit of leeway probably makes some sense too," the lawmaker said. "You want some degree of judgment; you don't want us laying it out so ironclad that there's not some degree of flexibility, but we need to add some detail there."