ICBA outlines wins, concerns in housing policy push

The Independent Community Bankers of America have seen some promising developments in federal mortgage proposals but they have concerns about some plans for policy too.

From recent congressional bills to government-sponsored enterprise reform and capital rules, ICBA Senior Vice President Ron Haynie shared thoughts on which pending policies could benefit or challenge members, depending on whether they move forward or get reconsidered.

What follows are some edited excerpts from that talk, which also included discussions relative to the Federal Housing Finance Agency's pending credit modernization initiative and related costs. 

Exam relief in the House's 21st Century bill

HAYNIE: We supported the House's Housing for the 21st Century Act. There was a community banking component to it that highlighted a lot of our priorities, particularly around more tailored exams.

We've always asserted that regulation should be tiered, and it shouldn't be one size fits all. Unfortunately, that's what often happens. There's a big financial crisis, Congress or the regulators act, and it's primarily focused on the largest banks. Then it rolls down to smaller institutions and that's a totally different world. So a big part of ICBA's push is for tailored regulation, supervision and oversight based on the risk of the institution. We were largely pleased with provisions that were in that housing bill. 

Small loan incentives in the Senate's version

HAYNIE: There also is a provision in the Senate's proposed 21st Century ROAD to Housing Act, and a recent executive order about incenting lenders to do small-balance loans. That's a great idea. The question is, what are those incentives? It's not clear. They were supposedly going to be paid by the government. There is not a lot of detail.

A lot of our members make small balance loans and keep them in their portfolios. They're not sold in the secondary market. The reason for that is if you try to originate a loan to be compliant with the secondary market, the cost to do that is prohibitive. Community banks make those loans in the areas they serve: small towns and rural America. That's where our members are. They will make a loan on an older manufactured home or a $100,000-$150,000 property. Our members make those loans because they know the borrowers and the market.

The Mortgage Bankers Association's last estimate on the cost to originate loans was somewhere around $11,000. So if you're making a $100,000 loan, you're not going to get $11,000 worth of revenue out of it to compensate for the costs. So, you have got to reduce the cost. There are a variety of ways to do that, but you probably can't originate that loan like a traditional mortgage.

The loan size limit of $100,000 may be too low. I would maybe increase that to $250,000 because trying to find a home for under $300,000 or $200,000 is tough.

These loans fall into the normal course of business for a lot of community banks. So it's not like they won't get made at all. I guess the real question is how many more could be made? What is that number, and what does it take to get it to grow? 

I don't think we're talking about $100,000 properties inside an urban area unless it's a major rehab. The city of Baltimore has hundreds of thousands of vacant properties. They used to have a program where you could buy a house for $1 but you had to renovate it. Maybe you could get a $100,000 renovation loan to do that. There are already renovation loans out there from FHA, Fannie and Freddie. So how much would something else move the needle? 

Every little bit helps. There's no magic pill here, you know. There's no one thing you're going to put your finger on that button and boom, affordable houses spring up all over the place. That is not going to happen.

Thoughts on the VA disclosure bill

HAYNIE: As far as other proposed legislation, one bill calls for an additional disclosure on the loan application where, if the borrower is a veteran or is in the military, then there would be a need to alert them to the fact that they might be able to get a VA loan.

We're not that thrilled about an additional disclosure. My guess is that lenders would tell their customers this in any event.

Support for regulatory relief

HAYNIE: I do think the regulatory burden is the big thing that's hung over everything since the financial crisis and rightly so. That was a horrible thing to go through. You don't want to do that again. But there has been some overreaction. In the quest to make sure it never happens again, you cut off some of the good things.

For community banks and the banking industry in general, there are very punitive capital requirements for things like construction or acquisition and development lending, holding mortgage servicing rights. It creates this situation where banks will reduce their lending in those areas.

If we're in a situation where we need to build more homes, we need more people making certain loans. You need local lenders providing the lending to go and develop a piece of ground.  If those lenders aren't there, then things don't get built. Regulators look at any kind of acquisition and development loan with extra scrutiny. 

If you're a megabank, you've got thousands of people in your compliance department. If you're a community bank, you only have a few but carry the same regulatory burden.

A call to lighten capital burdens

HAYNIE: We're certainly advocating for changes to the capital rules. We're very encouraged by the conversation with the regulators about lowering the community bank leverage ratio to 8%. 

When it comes to mortgages, the big one is ending the cap related to servicing rights. We've asked to exempt mortgage servicing rights from the calculation of CBLR completely. 

There are risk weights on loans in portfolios but those charges are not as bad as the 250% risk weighting on mortgage servicing rights. 

Views on GSE reform

HAYNIE: We're going on 18 years in conservatorship for what was going to be a timeout. The GSEs' earnings show they're rebuilding capital. They need to be released but it can't be just about trying to sell chunks of them to generate revenue for the government. It needs to be done in a thoughtful way. 

You don't want to blow up the housing market and I think people that are working on this do understand that. You have two companies that are becoming very well capitalized. They've got a little ways to go, but clearly there's more capital today than prior to the financial crisis and strong earnings. So why are they still in conservatorship? The economics of it should be fairly easy to work out. 

Our members depend on Fannie Mae and Freddie Mac. The GSEs won't compete for your customer and you don't have to give up the servicing of the loan. If they can service that loan, they're able to keep that customer, and that's very important. Community banks do relationship lending. 

The forecast for MBS buying impacts

HAYNIE: As far as Fannie and Freddie's mortgage-backed securities purchases, they are probably not going to drop rates 200 basis points or anything like that. But it should help tighten spreads to Treasuries and lower rates some. The FHFA can order them to do that because they're in conservatorship.

The GSEs aren't buying as much as they did before conservatorship. They are only authorized up to $200 billion. They're going to make those purchases when market conditions are best so they can get more bang for their buck. Hopefully that narrows spreads.

Credit scores and reports

HAYNIE: One other housing initiative we've engaged in for several years now is credit score modernization. If lenders pull both FICO and VantageScore for the GSEs, that's only going to add costs. It's an operational nightmare to do that.

They should repropose the rule. I think you need just to pick one score. Having two is not a good idea. 

We also support reducing the tri-merge to a single pull. It saves money and the tri-merge doesn't do anything to incent the credit bureaus to compete or improve accuracy.