GSE Reform Should Limit TBTF Banks’ Market Share

The Community Mortgage Lenders of America is urging Senate Banking Committee leaders to beware of “too big to fail” banks in crafting a GSE reform bill.

Independent mortgage banking firms are concerned the TBTF banks will dominate the primary and secondary mortgage markets and small lenders will be “price-squeezed into irrelevance,” according to a CMLA letter.

The housing finance reform bill sponsored by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., provides that a single entity cannot control more than 15% of the securitization market, but S. 1217 provides an exception that allows entities to securitize products they originate.

“Under this legislation, the dominant TBTF banks could exercise market power unimaginable today, even greater than that of Fannie Mae and Freddie Mac,” the letter says.

The CMLA letter points out the two TBTF banks together currently control 39% of the conventional origination market and 59% of VA/FHA market. (CMLA does not identify these TBTF banks.)

In addition, two TBTF banks control 51% of the Ginnie Mae issuer market. (The two banks are not necessarily the same in each category.)

The Corker-Warner bill allows small lenders to form a co-op to compete in the new market place. But CMLA members fear it will not be competitive with mega-lenders that have a large share of the origination and securitization market.

“Accordingly, we ask that any entity with more than 10% of the U.S. origination marketplace be prevented from entering the U.S. secondary market,” the Oct. 1 letter says.

In addition, “we ask that secondary market competitors to the small lender co-op have a hard cap of 10% of the total secondary market, with no exceptions for internal production.”