Senate Banking Committee leaders are proposing to capitalize a new mortgage cooperative with a government loan to ensure small and even regional lenders can sell their loans for cash.
Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel's top Republican, unveiled a high-level outline Tuesday of their plan to create a new housing finance system. One of its key attributes was the formation of a mortgage cooperative to help smaller institutions.
While the committee has released few details on the structure of the cooperative, sources briefed on the matter have begun fleshing out some of the specifics.
For example, they said the Johnson-Crapo bill will allow regional banks with up to $500 billion of assets to be members—a figure that includes all but the largest five banks in the country.
The details of the co-op are likely to be very important as the debate over the bill moves forward, industry representatives said. Some were quick to praise what they’ve heard so far, including the initial reliance on a government loan to fund the co-op's creation.
"It seems there has been more thought given on how to make the co-op work. Providing a government loan for the initial capitalization is a good step," said Scott Olson, executive director of the Community Home Lenders Association.
The new cooperative would take the place of the cash windows at Fannie Mae and Freddie Mac as a way for lenders to sell loans for cash rather than a mortgage-backed security.
The Johnson-Crapo version of the co-op is similar to a plan that was initially part of an earlier housing finance reform bill introduced last summer by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. Yet it includes some key differences.
For example, the Corker-Warner co-op was intended to serve small- and medium-size lenders, and likely would not have helped the bigger regional banks. It was also capitalized by member institutions, not the government.
While allowing regional banks to be members of the co-op may raise governance concerns, it should enhance the financial strength of the institution. Many bankers also fear that under the proposed housing finance system, which essentially creates a system akin to deposit insurance for the mortgage market, the biggest banks would dominate the MBS market.
Johnson and Crapo are expected to release the text of their bill in a few days, which will reveal more details about the mortgage cooperative.