One of the objectives of housing finance reform is to ensure small lenders can continue to sell their mortgage loans for cash once the wind-down and liquidation of Fannie Mae and Freddie Mac is complete. But “small” seems to be a relative term in this context.
Both government-sponsored enterprises currently operate cash windows, which community banks and independent mortgage banking firms rely on to sell their loans.
When Senate Banking Committee members unveiled a reform proposal last summer it called for creating a mortgage cooperative that would provide small lenders with a cash window. Many lender associations welcomed this step. It sent a message that Congress really understands how important this cash window is to thousands of community-based lenders.
But now the hard part of nailing down the details is coming to the surface. How should the cooperative be capitalized? Should membership be limited to small members or opened to lenders of all sizes? How does the new secondary market regulator ensure everyone has equal access and receives competitive pricing?
What seems to be emerging from this debate is that small is a relative term. It appears even regional banks might want access to this cash window. And a cash window is not a small operation.
Since 2007, banks, credit unions and mortgage bankers have tripled their use of Fannie’s cash window and doubled their use of Freddie’s.
In 2012, over 2,200 lenders sold $286 billion in loans for cash, representing 25% of Fannie’s purchase volume and 19% of Freddie’s purchase volume, according to the Federal Housing Finance Agency.
Furthermore, it would be difficult to capitalize the new co-op if membership is limited to small lenders.
If the entry fee is too high, small mortgage banking firms won’t be able to join, according to Scott Olson, executive director of the Community Housing Lenders Association.
CHLA contends a portion of Fannie and Freddie’s profits could be used to initially capitalize the co-op, which could be paid back over time. As an alternative Congress could provide a line of credit so members won’t have to pony up such a large amount of capital upfront.
“Once operating, it will generate profits and capitalize over time,” he said. Olson previously served on the staff of the Housing Financial Services Committee when former. Rep. Barney Frank, D-Mass., was chairman.
The American Bankers Association says membership in the co-op should be open to all lenders so there is sufficient financial backing to capitalize the co-op.
It is critical for community banks to have access to a cash window that allows them to “sell loans individually or in small numbers for cash,” ABA chairman Jeff Plagge recently told the Senate Banking Committee.
The chief executive of Northwest Financial Corp. testified that his Iowa bank sells loans via the cash window. He stressed that it is hard to generate “sufficient volume to execute our own mortgage-backed securities” and the interest rate risk and pipeline management cost would be too high.
There also is growing recognition that this “small” lender co-op must be a force in the secondary market or it won’t deliver competitive pricing to its members.
In the new housing finance system, the largest mortgage lenders (Wells Fargo, JPMorgan, and Bank of America) will be able to securitize their own product.
“The lender co-op has to have sufficient heft to obtain competitive capital markets terms, or it will be price-squeezed over time into irrelevance by the "too big to fail" banks,” says Rob Zimmer, head of external affairs for the Community Mortgage Lenders of America.
Zimmer noted that Fannie and Freddie guarantee or own $5 trillion in mortgage loans and securities. He stressed the co-op must scale up to at least $1 trillion to be competitive.
There also is a sense that the co-op must be up and running before Fannie and Freddie’s cash windows are shut down.
“If it doesn't start off strong on Day 1 of the new system, it will wither,” Zimmer warned.
There is solid support for ensuring a cash window will be available for lenders. There are also efforts to secure an alternative outlet in case the cash window does not pan out. And that alternative is the Federal Home Loan Bank System.
Olson stressed that CHLA’s priorities are to get the co-op up and running. “And secondly, to allow us to be limited-purpose members of the Federal Home Loan Banks to do securitizations,” he says.
Provisions in the House and Senate GSE reform bill expand the FHLBs’ powers to be securitizers. The only problem is independent mortgage banking firms are not currently eligible for FHLB membership.
And there will be a lot of push-back from banking groups if Congress tries to expand membership to nonbank lenders.
The Mortgage Bankers Association recently told lawmakers that independent mortgage bankers comprise 11% of all lenders nationwide yet they originated 40% of all purchase mortgages in 2012.
Expanding FHLB access to independent mortgage bankers would “enhance market liquidity and ensure a boarder range of mortgage options for consumers,” MBA chairman-elect Bill Cosgrove testified.
While some of the 12 regional FHLBs want to securitize mortgages, the American Bankers Association has taken the position that the FHLBs should continue to focus mainly on serving depository institutions that hold mortgage loans in portfolio.
“Mortgage bankers are not portfolio lenders. There are other government programs for mortgage banks,” says ABA executive vice president Bob Davis.
