Small Lenders United in Opposition to Big Bank Plans to Replace Fannie and Freddie
- July 21, 2017
Key senators and the Mortgage Bankers Association (MBA) want smaller lenders to believe big banks have their back on plans to overhaul of housing finance policy, specifically Fannie Mae and Freddie Mac, but a panel of smaller players expressed ample skepticism at a Senate Banking Committee hearing on July 20.
Chairman Mike Crapo, R-Idaho, and Sen. Mark Warner, D-Va., along with Sen. Bob Corker, R-TN, are once again looking at ways to transition away from having Fannie and Freddie at the foundation of the secondary mortgage market. It has been reported they would replace Fannie and Freddie with private companies, which would get a taxpayer guarantee for catastrophic risk. Similarly, the MBA is pushing a plan that would create four or five private “guarantors” that would compete against Fannie and Freddie. Again, there would be a government guarantee for catastrophic risk.
Small lenders have already voiced concerns about getting squeezed out of the home lending market if this happens. In an effort to allay those concerns, the MBA released a letter in advance of yesterday’s hearing insisting that big lenders support legislation to lock in reforms the Federal Housing Finance Agency (FHFA) has undertaken to protect community-based and local lenders in the mortgage market.
At this week’s hearing, however, the questions remained: What is the problem the big banks and their Senate allies are trying to solve and how are the MBA’s plans or ideas Corker, Crapo and others are considering going to help small lenders and their borrowers? More specifically, Sen. Sherrod Brown, D-OH, asked if there should be more than two guarantors. Here were the responses:
– “It’s important that we don’t allow multiple GSEs into the market. For a small lender, the more complex it is, the more your legal costs rise and the more your internal costs rise to try and keep up with all of the differences within the different GSEs. So, the consistency that Fannie Mae and Freddie Mac provide is extremely important,” said Wes Hunt, on behalf of the Community Mortgage Lenders of America (CMLA).
– “We would expect the guarantors to be pretty tightly regulated and unless there is significant flexibility in those regulations, why would you need three, four or five GSEs in the same market?” wondered Charles M. Purvis, on behalf of the National Association of Federally-Insured Credit Unions (NAFCU).
– Tim Mislansky, for the Credit Union National Association (CUNA), wondered why it was necessary to have more than two companies doing the same work.
– Brenda Hughes, testifying for American Bankers Association (ABA), however, allowed that it makes sense to have at least two such companies, to ensure innovation in home finance.
Once again, it is evident that the hundreds of institutions these witnesses represent oppose creating a risky new scheme to replace what has worked well. They simply want to see the mandate of the Housing and Economic Recovery Act fulfilled: Fannie and Freddie should have adequate capital to operate in a sound and solvent manner and continue providing countercyclical liquidity in home lending market. Let’s remember that is not what private sector lenders do. The last time they did, they closed shop and contributed to the downward spiral heading into the 2008 financial crisis.
“I would say you had two who worked pretty well for about 70 years until they started to stray from their mission and the regulator allowed them to,” said Jack E. Hopkins, on behalf of the Independent Community Bankers of America (ICBA). “We now have a strong regulator in place, is it really necessary to duplicate the cost?”
Last week, the Senate Banking Committee held a hearing on plans to create a new system anchored by private sector players. Even if these entities could replace the level of capital Fannie and Freddie provide,which is doubtful, Senators need to think carefully about disruptions to the system and risks for taxpayers this could entail. Why should taxpayers be asked to provide backup for new private-sector entities? Why not simply make sure Fannie and Freddie are capitalized and run to protect taxpayers in all but the most catastrophic circumstances?
William Giambrone, president of the Community Home Lenders Association, echoed that concern, saying, “It is a mistake to create new too-big-to-fail institutions. The likely impact of authorizing new charters would be to grow the government, to increase the risk of a taxpayer bailout.”
The MBA claims their plan has provisions to prevent the biggest banks from dominating the secondary market, with limits on how much of a piece of the new “guarantors” lenders could own.
But backers of this approach and lawmakers determined to shut down Fannie and Freddie – and abdicate commitments to the shareholders who own the companies – still can’t fully explain why this is a better idea than simply locking in progress to date in creating a more stable system with Fannie and Freddie. The companies have paid back roughly $80 billion more than taxpayers extended eight years ago and have been operating profitably with smaller investment portfolios and tougher regulatory standards for years. HERA gives FHFA the authority to end the conservatorship. There is a blueprint for doing this. As was evident at yesterday’s hearing, that is a better idea to consider than waiting for Congress to reinvent the wheel.