WASHINGTON — The indications from Congress are clear: there will be reforms made to the secondary mortgage system that long has relied on government-sponsored enterprises Fannie Mae and Freddie Mac — but the $9.4-trillion question is: what will the new system look like?
With a new discussion draft introduced by Rep. Maxine Waters, D-Calif., in March, there are four potential pieces of legislation purporting to make major changes to the way lenders sell mortgages to investors. The Waters proposal would put in place a lender cooperative that would issue government-backed securities, instead of the GSEs, and introduce yet another new regulator, the National Mortgage Finance Administration.
Brad Thaler, VP of legislative affairs for NAFCU, noted Jeb Hensarling's PATH Act (Protecting American Taxpayers and Homeowners Act) is active in the House of Representatives, while in the Senate a great deal of focus has been on two bills, the Corker-Warner Housing Finance Reform and Taxpayer Protection Act, introduced in June 2013 by Bob Corker, R-Tenn., and Mark Warner, D-Va., and another introduced in March by Senate Banking Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, also know and the Johnson-Crapo bill.
"There seem to be two different approaches," Thaler told Credit Union Journal. "One approach is seen in the Senate bills and the Waters proposal that would wind down Fannie and Freddie while maintaining a government backstop. The other is the PATH Act in the House,which would remove the government backstop."
How the various legislative maneuvers play out remains to be determined, Thaler noted. He said both the Corker-Warner and Johnson-Crapo bills have bipartisan support. "Johnson-Crapo builds off Corker-Warner, and seems to have more momentum." (See related story on page 1.)
NAFCU has been reviewing all the proposals, and believes the best option for credit unions is a solution that preserves the government guarantee on mortgages.
"We want to see credit unions have access to the secondary market and have fair pricing based on the quality of credit union loans," he said. "We look at the proposals to make sure they work for credit unions and will not be too costly. We want any changes made to the housing finance system be reasonable. We have been talking with all the different groups that are working on this and will keep in touch with our concerns as the legislation moves on to mark-up and forward."
Swift Resolution Doubtful
Thaler cautioned it may take until the next Congress before a final piece of legislation is passed, much less implemented. Assuming Johnson-Crapo gets out of committee, he said it will take time to work through issues over the summer. The bill would not get to the floor before June or July, and August is the month Congress goes into recess.
Indeed, the Senate banking panel last week delayed a vote on the bill that had been slated for April 28 or 29 (see related story on page 8).
"In September only a few things get done before everybody leaves to go to campaign for the November elections," Thaler explained. "There will be a brief lame duck session after elections, which sometimes have different dynamics if there are changes coming to which party has control. All of that is in the Senate, and any legislation still would have to pass both bodies."
Because any of the proposed bills would mean major change to the housing finance system, Thaler said there is a question whether lawmakers even want to try to touch the subject while running for reelection.
"The calendar makes it challenging to get anything done this year. Obviously, if something is not passed this year there could be changes in the next Congress," he said, pointing out Chairman Johnson has already announced his retirement, meaning there will be a new chairman of the Senate Banking Committee. "Depending on who that is could play a role in what happens in the future with this approach. Which party is in control of the Senate, and what the ratio of the Senate is, also are factors."
CU Reaction: Where Do We Go?
John Murphy, manager of mortgage lending for $501 million Consumers CU, Kalamazoo, Mich., predicted Hensarling's bill, which calls for privatization of the secondary mortgage market and would gut government guarantees, probably will not get to the floor for a vote.
Both Corker-Warner and Johnson-Crapo proposed to create a Federal Mortgage Insurance Corporation, with a mortgage insurance fund capitalized by a 10 basis point fee on originations, which Murphy said is an acceptable concept but still leaves one major question unanswered.
"What everybody is worried about is, if we pull the plug on Fannie and Freddie, where do we go from there?" Murphy asked. "Goldman Sachs was the master of private securitization, and look what happened."
Another concern Murphy has is the proposed mutual insurance fund would not kick in until 10% of private capital has been wiped out. "That is potentially billions of dollars in capital, and that will have to flow through to fees charged on loans," he said. "Rates will have to go up, everyone has acknowledged that."
Consumers CU currently uses the Fannie Mae cash window, where lenders can sell loans on a "flow" basis. Murphy pointed out both the Corker-Warner and Johnson-Crapo models would create a small lender mutual that would be owned by the members of the cooperative. Credit unions could join the mutual, have the ability to join the board, manage affairs and set pricing, he said
"The Waters bill is similar," offered Murphy. "There is not a lot of ink on the Waters bill yet, but all three do away with the affordable housing mandate, have a 10 basis point fee, and guarantee access to a cash window for smaller lenders."
As for the potential risk for credit unions: Murphy said they will just have to wait and see. "So far we do not have a seat at this table. The Corker-Warner bill sets the threshold at $15 billion in total consolidated assets for a 'small' lender, while Johnson-Crapo sets the threshold at $500 billion. That puts almost all credit unions in with community banks.
Similar to NAFCU's Thaler, Murphy predicted nothing will happen in Congress before the next election cycle, possibly as long as 24 months. Murphy said he does not see a "great urgency" because the mortgage business is off significantly since the refi boom ended.
"The FHA is coming out with statements on loosening credit. Certainly something is going to change, and it is not going to be status quo two years from now," he predicted. "These bills pretty much guarantee there no longer will be 30-year, fixed mortgages. Trying to wean us off Fannie and Freddie will require higher interest rates."
Current Model 'Broken'
Tim Mislansky is SVP and chief lending officer at $2.7 billion Wright-Patt Credit Union, Fairborn, Ohio, and president of its CUSO, myCUmortgage, said that he is "encouraged" by much of what he read so far on the Waters bill.
"The current model of Fannie and Freddie remains broken and needs to be fixed," he said. "It is a big and complex issue that will impact credit unions and their members. My early read causes me to believe that the Waters bill allows for a context to keep the 30-year, fixed-rate mortgage with a worst-case government guarantee and that it maintains an open, stable and equitable secondary market."
Mislansky added he is hopeful the push for legislative reform becomes the start of a "real change" with the GSEs to produce a new system of American housing finance. "I encourage credit unions to remain diligent of this matter as it starts to move through the legislative process and be active participants in the process."
Mortgage Credit Crisis On Horizon
Count Lonnie Burkholder, VP of Mortgage Lending at $470 million Air Academy Federal Credit Union, Colorado Springs, Colo., as one who is very concerned about the entire reform process. He said credit unions are "especially vulnerable" to any changes in the GSEs, as Fannie and Freddie make up almost the entire secondary market outlet.
If a new GSE increased compliance, Burkholder said it would be difficult for the small nature of credit unions to remain competitive in the mortgage market.
"A huge mortgage credit crisis is on the horizon," he said, due to the fact Fannie Mae and Freddie Mac are mandated to shrink by 15% per year in an effort to limit U.S. government mortgage liability. "Planned cuts in conforming loan limits will hasten the credit shortage."
In 2013, the federal government backed 99% of all closed mortgages. According to Burkholder, discussions of private mortgage participation are "disingenuous" when stimulus efforts have driven yields below public appetites.
"New banking capitalization requirements mean there simply is not enough liquidity within the banking institutions to replace Fannie and Freddie," he argued. "And we need to keep in mind the lagging economy cannot afford a credit crisis."
Before there can be a discussion of shuttering Fannie and Freddie, Burkholder said liquidity must be addressed. He asked where is the private money going to come from, enough to sustain a trillion-dollar-plus-per-year industry?
"Wall Street has no appetite and financial institutions are not allowed to significantly exceed current mortgage holdings," he said. "A new name will not solve the pending liquidity shortage."
Burkholder argued the federal government must participate in the mortgage arena, at least until the market can return to a sustainable state without continued government subsidies. "There are no short fixes," he said.
"Fannie and Freddie have found a profitable foothold, so now is not the time to break what is working," Burkholder added. "It is time to rebuild confidence so the private sector can organically reenter the market, reducing the need for public control and avoid a credit crisis."
Murphy, Mislansky and Burkholder all are board members for ACUMA, the American Credit Union Mortgage Association, which is based in Las Vegas.
