Will GSE reform hurt small lenders? Senators weigh in
WASHINGTON — Senators dove deeper Wednesday into the fight over which housing finance reform plan will work for lenders of all sizes, just as the Trump administration moved closer to crafting its own reform plan.
The second Senate Banking Committee hearing this week on reforming the government-sponsored enterprises touched on whether Fannie Mae or Freddie Mac should be converted into private-sector companies that compete with other guarantors in the market, or whether such a framework could disadvantage smaller loan originators.
That multiple-guarantor model is at the heart of a legislative proposal by Banking Committee Chairman Mike Crapo, R-Idaho. But smaller lenders such as community banks and credit unions appear to favor a model where Fannie and Freddie operate as regulated utilities, which backers say will ensure a level playing field.
“If we were to move to a multiple-guarantor system, we could see some positives and likely some positives for investors, in terms of in the good times, but when the economy ultimately turns?” said Carrie Hunt, the executive vice president of government affairs at the National Association of Federally-Insured Credit Unions, testifying at the hearing. “Do those multiple guarantors seek out the business of small lenders, or do those multiple guarantors constrict? And what happens with all of us jockeying for a position?”
The two hearings sharpened the focus on legislative GSE reform, but looming in the background was a memo slated to be signed by President Trump Wednesday asking the Treasury Department and the Department of Housing and Urban Development to draft a reform plan — including both legislative and administrative options — for Fannie and Freddie. The memo could stoke earlier speculation that the administration could move forward without Congress.
“The notion that this may be taken away from Congress is, I think, is a concern,” Sen. Mark Warner, D-Va., said at the hearing Wednesday, echoing comments from other lawmakers at Tuesday’s hearing.
But regardless of which branch of the government takes the lead, developing a reform plan that satisfies the many constituencies involved in the mortgage system is still a tall order.
Crapo’s proposal suggests allowing private guarantors to compete with Fannie and Freddie so long as they are not federally insured depository institutions. But it would be difficult for a private guarantor to compete based on the sheer size of the two current GSEs, even if the footprint of the two mortgage giants shrinks, said Lindsey Johnson, the president of U.S. Mortgage Insurers.
“We’ve got concerns about if you can ever really strip enough away from the GSEs to allow other guarantors into the market, and we think a viable option would be to transition the system, either turning the GSEs themselves into a utility for the long term, or simply as a transition step,” Johnson said.
Vince Malta, the president-elect of the National Association of Realtors, and Michael Calhoun, the president of the Center for Responsible Lending, along with Hunt, agreed that a utility model would not only better suit small lenders, but would also ensure that underserved communities are provided with equal access to the secondary market.
“One of the themes you’re hearing from ... community lenders is that this market tilts toward the largest lenders naturally because of those huge economies of scale,” Calhoun said. “The GSEs are an important counterweight to that because they are required to serve small lenders … and for institutions, it’s very much smaller lenders can’t swim in a system that tilts heavily toward the large lenders.”
However, others felt that a multiple-guarantor model would increase competition, especially in the case of Crapo’s plan, which would preserve the cash window that currently allows smaller lenders to sell loans directly to the GSEs with lower pricing.
“We don’t know whether private capital will come in with the billions of dollars of capital that would be required [in a utility model],” said Robert Broeksmit, the president and CEO of the Mortgage Bankers Association. “We think the FHFA capital standards are a helpful step so that other private entities could decide, but we think that just the ability for private capital to come in other than Fannie and Freddie is helpful and healthy for competition in the market.”
Sen. Sherrod Brown, D-Ohio, the committee’s ranking member, emphasized that most of the witnesses at Tuesday’s hearing “agreed that all guarantors must serve a broad national market.”
As a sort of compromise to ensure that private guarantors would service underserved borrowers, Michael Bright, CEO of the Structured Finance Industry Group, proposed designating some guarantors specifically to focus on underserved markets.
“If you had a concept of a guarantor that wanted to focus on an underserved market—a rural market, or Puerto Rico or a place that is underserved—it’s possible that they could do it better and that they could innovate and serve that market, and then likely maybe a national guarantor would take over doing that,” he said. “So I think you would end up with national guarantors, but I think if they wanted to serve an underserved market that there should potentially be some allowance for that.”
While no consensus was reached, particularly on how community lenders would be included in a multiple-guarantor system, several senators on the committee outlined areas that seemed to have broad agreement across the two hearings.
“I actually hear more agreement from yesterday and today, including all 12 participants, in terms of maybe us inching closer,” Warner said. “I hear a broad set of agreement around a government guarantee; I hear a broad set of agreement around additional support for low- and moderate-income.”
Brown highlighted four areas of agreement, including "that guarantors must serve a broad national market, that guarantors must all serve all lenders equitably and that takes more than a cash window."
"Third, we must preserve a duty to serve, and fourth, having guarantors that are regulated utilities with regulated rates of return,” he said.
Although the prospects for legislation are dim in the short term, Crapo has said numerous times that housing finance reform is one of his top priorities as chairman, and appeared energized by this week’s hearings.
“As the two days have concluded, obviously we’ve identified some areas where there are some needs for further discussion,” he said. “On that note, however, I don’t think I’ve seen anything that tells me that we can’t get bipartisan or shouldn’t be able to get bipartisan support for a common approach to solving this issue.”