GSE reform proposals have small lenders on edge

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WASHINGTON — As lawmakers shop plans to overhaul the housing finance system, small lenders are still skeptical that any of the various legislative proposals will work for them.

Since Fannie Mae and Freddie Mac became wards of the government, community banks and credit unions have held their own competing with bigger lenders for originations. The Federal Housing Finance Agency took steps making it easier for lenders to sell loans to the mortgage giants on a smaller scale.

But those small lenders worry that plans proposed by Senate Banking Committee Chairman Mike Crapo, R-Idaho, and others to reform the government-sponsored enterprises could upset that balance, replacing a system where they can now make quick cash sales to Fannie and Freddie with something that will prove too complex.

“The more complexity that you add to the system, the more you box out smaller, community banks,” said Camden Fine, the president and CEO of Calvert Advisors and the former head of the Independent Community Bankers of America. “As a general rule of thumb, the simpler the better when it comes to community banks in the secondary mortgage market.”

Among the steps taken by the FHFA during the decade-plus conservatorship were lowering the pricing for lenders to sell loans directly to the GSEs through a "cash window" relative to exchanging them for securities, and ending discounts for lenders that originate large volumes of GSE-backed loans.

“The FHFA has undertaken initiatives to ensure that there’s pricing parity and so larger financial institutions with more volume don’t get a pricing discount from Fannie and Freddie,” said Mitria Wilson, the senior director of advocacy and counsel at the Credit Union National Association. “That was a big problem of the past, but that’s something that’s no longer a reality.”

Smaller lenders agree that releasing Fannie and Freddie from their conservatorships without a healthy level of capital, proper safeguards and other structural changes would be dangerous. But some observers representing community-based institutions view recent GSE proposals as going too far to overhaul a system that they say is working more efficiently.

“With the cash window, you go directly now and get the same [guarantee] fee that the big bank does, so the ability to go through a transaction is equal with ABC Mortgage and Bank of America," said Ed Wallace, the executive director of the Community Mortgage Lenders of America. "The cash window allows that execution to be on a level playing field.”

Under the legislative outline released by Crapo on Feb. 1, Fannie and Freddie would be privatized and compete with other private mortgage guarantors, all of which would have their portfolios capped. Loans would be securitized through a platform operated by Ginnie Mae, which would provide an explicit government backstop.

The plan does call for private guarantors to be able buy loans directly from originators through a cash window, but smaller lenders say they doubt such a system would ensure their ability to compete.

Crapo's proposal is one of numerous Ginnie Mae-centric legislative plans that have circulated recently.

“Securitizing a loan or a group of loans in a Ginnie Mae pool — it’s not an easy process, and most community banks just don’t do that,” said Ron Haynie, the senior vice president of mortgage finance policy for the Independent Community Bankers of America. “They sell loans for cash through a cash window, which is why Fannie Mae and Freddie Mac are so important to community banks, because they can sell one loan at a time and get paid for it and retain a servicing.”

Plus, as part of the Department of Housing and Urban Development, Ginnie Mae is also part of the government appropriations process, meaning that a government shutdown could put a halt to any platform overseen by the agency, Haynie said.

“Certainly if you think about the GSE market, which is considerably larger" than that currently tied to Ginnie, "you don’t want to put that market at risk like that as well,” he said.

Wilson noted that Crapo's GSE reform plan did not appear to champion volume discounts, which reward big lenders that originate a large amount of loans. But it lacked sufficient detail on any mechanism to ensure that private guarantors, including but not limited to Fannie and Freddie, would be obligated to serve small lenders, she said.

“It’s also important to ensure that private guarantors have an obligation to serve smaller financial institutions,” Wilson said. “We want to be able to pay the same price, but if they don’t have to serve us, all things being equal, it’s a lot easier to take 15,000 mortgages from Wells Fargo than it is to take 500 from us.”

Haynie said while Crapo’s plan centered on the idea of competition between multiple guarantors, that competition should take place between lenders originating loans, not in the secondary market.

“In the government-backed market, you probably don’t want competition, because the more competition there is, the only way you compete is price or credit in the mortgage business,” he said. “The more competition there is, you run the risk of actually increasing the risk to the government exponentially as opposed to doing a better job of protecting taxpayers.”

Even though small financial institutions have benefited with Fannie and Freddie's current role in the system, Fine said, community lenders recognize that the GSEs are not sustainable in their current form. Still, he said, community banks are pushing for a future that preserves the two companies in some way rather than winds them down completely.

“At the end of the day, what community banks would like is to see the two GSEs recapitalized and eventually released from conservatorship with restrictions, so they wouldn’t get back into the kind of trouble they got into,” he said.

In that way, Crapo’s housing finance reform plan is a breath of fresh air for smaller financial institutions because it does maintain a role for Fannie and Freddie, Haynie said.

“We certainly are encouraged to see that in [Crapo’s] outline he does have a role for Fannie Mae and Freddie Mac to continue … because most of them revolve around Freddie and Fannie ... [getting] wound down, done away with, and we certainly don’t support that, because the system works and it works well, and it works extremely well for community banks,” he said.

But if Fannie and Freddie are merely competing in a market of private guarantors, it could be difficult for any one of those guarantors to attain the size and scale necessary to serve lenders of all sizes.

“This is one of the biggest challenges of talking about the secondary market of the future,” Wilson said. “We’re talking about trillions of dollars of mortgage debt, and if you do the math, there’s nobody out there with the scale or capital to be able to stand in these places.”

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