Congress Begins To Reshape The Secondary Market

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Congress began the final steps last week in recasting the vast secondary mortgage market with a proposal for a new regulatory scheme for Fannie Mae and Freddie Mac, the market's two biggest players, as well as the 12 Federal Home Loan Banks, which have become growing competitors in the business of buying mortgages from credit unions and banks.

A bill passed by the House Financial Services Committee provides new opportunities for credit unions and banks by allowing Fannie and Freddie to buy and securitize jumbo mortgages- those over the two agencies' current $360,000 conforming loan limit for single-family residential mortgages-of up to $540,000 in high-cost housing markets, such as Southern California.

The bill would also require the two government-sponsored enterprises to kick in as much as 5% of their annual profits to create a multi-billion dollar fund that would be used to finance affordable housing grants-similar to the affordable housing programs currently required by the FHLBs for their bank and credit union members.

But the measure, which must still pass the full House and then the Senate, represents a big victory for the long-time critics of Fannie Mae and Freddie Mac, who have waged a powerful behind-the-scenes lobby to rein in the two housing giants because it would require a new Federal Housing Finance Agency overseeing the two companies and the FHLBs to set a "bright line" delineating what secondary market activities Fannie and Freddie can engage in and what they may not do.

This has become a growing concern for other big players in the huge mortgage market who worry that the two government chartered companies have used federal benefits, such as the implicit federal guarantee on debt, to encroach on the primary, or originations, market, by introducing uniform loan underwriting software, buying interests in on-line loan brokers, and even extending into related markets such as loan foreclosures and insurance.

The credit union lobby, which has remained on the sideline for much of the debate between mortgage market titans, weighed in last week against the "bright line" test with both CUNA and NAFCU, each of which have lucrative financial partnerships with either Fannie or Freddie, expressing concern such a distinction could prevent the two companies from expanding their assistance for small players in the mortgage market, particularly credit unions.

Dan Mica, president of CUNA, which has a deal to steer credit union business to Freddie Mac, called on lawmakers prior to last week's vote to reject the "bright line" provision because "it may preclude many GSE activities that have increased access to mortgage credit and have enhanced competition." He cited the automated underwiting programs offered by both Freddie and Fannie that have helped credit unions and other smaller players underwrite and sell off mortgages on the secondary market.

Fred Becker, president of NAFCU, which has its own financial arrangement with Fannie Mae, went even further, stating a 'bright line' test "would wreak havoc in the real world of mortgage finance-particularly in the world of mortgage finance in which credit unions and other small and mid-sized lenders operate."

The bill passed by the Financial Services Committee last week would grandfather the two companies' automated underwriting programs as well as other services considered unrelated to secondary market activities, like financial counseling and homebuyer education programs the two companies now offer, but bar other unrelated activities, or so-called 'mission-creep' for the two secondary market giants.

It would bar entries into loan brokerage, as Freddie did three years ago with a stake in on-line broker Lending Tree, which it eventually sold off. Or home foreclosure, which Fannie entered into, as well as insurance, electronic signatures, and other areas not directly related to the original mission of the government-sponsored enterprises.

Competitors of the two companies, pointing to Sallie Mae, another entity chartered by the government to create a secondary market in the lending arena, which has grown into a giant competitor with the banks and credit unions it was chartered to serve and now dominates the student loan market, fear a similar scenario in the mortgage market.

The bill passed by the committee last week will also allow the new regulator to set capital standards for Fannie and Freddie, to take them under conservatorship in the case of insolvency, and eliminate a requirement that the president appoint five members to the board of each.

The committee rejected controversial proposals that would have capped the limit on the amount of mortgages the two companies could hold in portfolio, and to eliminate the $2.5 billion line of credit with the U.S. Treasury for each company.

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