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Don’t Give Fannie and Freddie’s Business Away to TBTF Banks

We were pleased to see the Community Mortgage Lenders of America and the Community Home Lenders Association come together last week to take a stand against putting the secondary mortgage market in the hands of the Too-Big-to-Fail Banks.

 The associations, which together represent an array of bank and non-bank community-based mortgage lenders, penned a joint letter to FHFA Director Mel Watt to express concern over the Administration’s seemingly shifting narrative on the purpose of the Common Securitization Platform. In particular, the associations took issue with a recent statement made by Director Watt that the CSP will be “adaptable for use by other secondary market participants in the future.” The letter said:

“This statement…appears to signal a change from your statement of May 13, 2014, when you said that the goal of the CSP was to reconcile Fannie Mae and Freddie Mac MBS to reduce the pricing disparity between the two… While on its face, a statement that the CSP could be adaptable for use by other secondary market participants sounds laudatory, in practice any such access will likely not accrue to small lenders, which do not have the ability to invest large fixed sums in staffing and systems to take advantage of issuing and hedging securities. Instead, the largest banks would be the main beneficiaries, as they can invest the sums of money to enter this marketplace and use their existing federal subsidies to help underwrite this new endeavor.”

The associations’ concern over making the CSP available to private lenders is well-founded; doing so would almost certainly ensure that the big banks could squeeze community lenders out of the market and, in doing so, make it harder for many Americans to get access to mortgage credit. What’s even more troubling, as they note later, is that expansion of the large banks’ role would, of course, be funded by the GSEs.

“One must also ask whether the creation of such a platform, for the use by primary market participants, is allowable under the GSEs charter or under HERA and why the costs of such a platform should be funded by the GSEs rather than passed on to those secondary market institutions who seek access.”

As we have pointed out repeatedly, the intent of the conservatorship is to return the GSEs to “sound and solvent.” This is laid out clearly in HERA. What is not included in HERA is the notion that the government should use the GSEs as a piggy bank to fund a scheme aimed at handing the entire mortgage market over to TBTF banks. Every participant benefits from greater competition in the mortgage market. Consumers have greater access to mortgage credit, and the GSEs have a larger pool from which to buy qualified mortgages while diversifying their exposure to counterparty risk.

Given the extreme uncertainty that exists in the market due to the ongoing conservatorship, the administration needs to do everything in its power to provide for continued access to mortgage credit while ensuring as much stability as possible. Placing the fate of the entire market in the hands of a select group of systemically important financial institutions will achieve just the opposite.