WASHINGTON — Fannie Mae and Freddie Mac's working relationships with community banks provide a crucial underpinning to rural finance, according to a report issued Wednesday by the Brookings Institution and the Center for Responsible Lending.

Loans made in rural communities made up 17.5% of the mortgage market in 2016, and 30% of those loans were purchased by Fannie, Freddie and Farmer Mac, the report said.

Community banks and credit unions provide more credit to rural communities than they do to urban areas and hold a larger market share in rural areas than the 10 largest lenders, the report also found. Small banks and credit unions had a 31% market share of rural-area lending in 2016, compared with 20.9% for the 10 largest lenders, according to Home Mortgage Disclosure Act information collected by the CRL.

The timing of the report is important as House and Senate lawmakers are beginning to draft housing finance reform legislation that would restructure Fannie and Freddie. If current mandates on the government-sponsored enterprises are eliminated, it probably would be more difficult for community banks and credit unions to serve rural markets.

“Proposed changes to the housing finance system could substantially reduce the ability of community banks to effectively access mortgage funding and serve consumers in rural communities,” said Michael Calhoun, the CRL's president.

Signage in front of the Fannie Mae and Freddie Mac headquarters.
Complex system
“Proposed changes to the housing finance system could substantially reduce the ability of community banks to effectively access mortgage funding and serve consumers in rural communities,” says Michael Calhoun, the president of the Center for Responsible Lending and the co-author of a report that highlighted the roles of Fannie, Freddie and small banks in rural finance. Bloomberg News

A Senate proposal in 2014 would have phased out Fannie and Freddie, and the affordable housing goals in that proposal didn’t go far enough to satisfy consumer groups like the CRL.

House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Tex., said in a speech last month that he wants wind down the GSEs and is gravitating towards drafting legislation that would utilize the Ginnie Mae securitization platform to back most mortgages.

But the report indicated that community banks favor the GSEs and relied on them by a factor of 10 to 1 compared with Ginnie Mae when it came to loan purchases.

“Today’s report demonstrates the critical role that community banks, credit unions and GSEs, working together, have played in the economic recovery and in support of rural America’s housing market,” said Calhoun, who wrote the report along with Tom Feltner, director of research at the Center for Responsible Lending, and Peter Smith, a senior researcher.

The report notes that community banks often rely on Fannie and Freddie’s cash window, which allows them to sell individual loans to the GSEs and to maintain servicing rights.

“Specifically, GSEs help to level the playing field between community banks, credit unions and big financial institutions through a cash window and parity in pricing. This enables community banks and credit unions to have long-term, productive relationships with borrowers,” Calhoun said.

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