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Community Bankers Plan Offers Sound Roadmap for GSE Reform

Among the constructive recommendations in the Independent Community Bankers of America’s proposal for reforming Fannie Mae and Freddie Mac unveiled today was that the rights of the companies’ shareholders must be upheld. 

Most blueprints on GSE reform offered to date either ignore or are hostile to shareholders so we welcome the ICBA’s consideration. Upholding the rights of shareholders is not only the right thing to do, it is also practical. Shareholders remain determined to assert their rights. Therefore, any plan to end the conservatorship that ignores shareholders ignores reality.

The ICBA’s proposal is based on several other sound principles Investors Unite has long championed, notably that it is long past time for Fannie and Freddie to rebuild their capital buffers, consistent with the law and in the interests of taxpayers:

The GSEs must be allowed to rebuild their capital buffers. The first step in GSE reform requires the FHFA, the GSEs’ safety and soundness regulator, to follow the mandates prescribed in the 2008 Housing and Economic Recovery Act (HERA), namely, to restore the GSEs to a safe and sound condition. Regardless of which approach or structure reform takes, the existing system must be well capitalized to prevent market disruption or additional taxpayer support in the event of one or both GSEs requiring a draw from the U.S. Treasury during what’s likely to be a lengthy debate and transition period to any new structure or system.

In many ways, the ICBA’s recommendations are based on restoring Fannie and Freddie’s chief function, which is to provide enough liquidity in the marketplace for a variety of lenders to make loans on terms affordable to as many people as possible in good economic times and bad. The ICBA asserts that the GSEs should not be going up against loan originators at the retail level, “where they would enjoy an unfair advantage,” but focus on secondary mortgage market activities.

The ICBA’s proposal casts a wary eye on some of the changes that have been implemented in the course of the conservatorship of the GSEs, now in its ninth year.  For example, the ICBA echoes concerns we have had about credit risk transfers (CRTs), stating, “ While these CRTs may help mitigate the amount of credit risk both the GSEs and taxpayers bear, these transactions also drain revenue away from the GSEs and expose them to operational risks.” It added:

Additionally, CRT securities are currently illiquid and would likely dry up in times of market stress. CRTs, regardless of their form or structure, must reflect a real transfer of credit risk, minimize counterparty risk, be scalable, meet a targeted economic rate of return set by FHFA, and not encourage further concentration of the mortgage business in the largest banks.

In addition, the ICBA’s proposal warned against handing over Fannie and Freddie’s assets and functions  to the nation’s biggest banks, saying, “Assets such as the GSEs’ automated underwriting technology, loan delivery portals, Common Securitization Platform, and multi-family housing businesses should not be sold or transferred to private market aggregators.”

Investors Unite has raised similar concerns about the CSP, questioning not only the impetus for its creation but also whether the GSEs have been forced to create an infrastructure that would end up benefitting primarily large banks.

The ICBA rightly recognizes that HERA provides the Federal Housing Finance Agency with the authority it needs to undertake these reforms. While the proposal recommends that Congress should make changes in the GSEs charters and create a catastrophic mortgage insurance fund as an explicit government guarantee of the GSEs, we would argue that, if the companies are capitalized and have adequate buffers, then action by Congress should not be necessary. As we noted this week in a critique of a plan offered by the Mortgage Bankers Association, the less reliance on Congressional action the better.

Community bankers have long been a critical component of the home lending marketplace and a thoughtful voice in warning about the consequences of dismantling Fannie and Freddie and creating a system dominated by a handful of large banks. It is helpful to have them offer constructive and timely ideas that include respecting the rights of shareholders.