A leading credit union executive urged lawmakers to maintain a role for the federal government in whatever reform scheme they adopt for the secondary mortgage market, even as a House proposal would eventually phase out the government role.
Janice Sheppard, senior vice president of mortgage compliance at Southwest Airlines FCU, told members of the House Financial Services Committee, that any reform should ensure that small lenders, like credit unions and community banks, retain equal entry into the secondary market and not be left to the mercy of megabanks that dominate the market.
“As the Committee works on housing finance reform issues, a primary concern of credit unions is continued unfettered access to the secondary mortgage market including adequate transition time to a new system—should lawmakers see such a change necessary,” said Sheppard, who was appearing on behalf of NAFCU.
“A second concern, equally as important is recognizing the quality of credit union loans through a fair pricing structure,” she said. “Because credit unions originate a relatively few number of loans compared to others in the marketplace, they cannot support a pricing structure based on loan volume, institution asset size, or any other geopolitical issue that will lend itself to discrimination and disadvantage their member-owners.”
Sheppard’s plea came as the federally backed secondary market has become
The credit union executive’s testimony came as the House has introduced a bill that would wind down Fannie and Freddie in five years and privatize the secondary market, eventually removing the government backstop. A separate proposal in the Senate would also wind down Fannie and Freddie, but retain some government role with a newly created insurer of mortgages.
Credit unions, Sheppard told lawmakers, must have continued and unfettered access to federally supported secondary market sources like Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks who buy credit union mortgages and package them for sale on the secondary market, said Sheppard. “Not only does this allow credit unions to better manage risk, but they are also able to reinvest those funds into their membership by offering new loan products or additional forms of financial services.”
She also said NAFCU believes that the government guarantee on mortgage-backed securities packaged from credit union loans should be maintained. “The explicit guarantee will provide certainty to the market, especially for investors who will need to be enticed to invest in the MBSs and facilitate the flow of liquidity,” said Sheppard.
Sheppard’s testimony was preceded by a clash between Republicans on the committee, who wrote the proposal, and Democrats, who overwhelmingly oppose the measure because of fears that removing the government from the secondary market will victimize by borrowers and small lenders, like credit unions and community banks, by leaving them to the mercy of the mega-banks that currently dominate the mortgage market. “Without a government backstop wouldn’t the market be vulnerable to investor runs in times of stress,” asked Rep. Carolyn Maloney, D-N.Y.
The Republicans are particularly anxious to wind down Fannie Mae and Freddie Mac because of the huge cost, $190 billion so far, the five-year bailout of the two companies has cost taxpayers and because they are philosophically opposed to the government subsidizing the mortgage market.
