Economists at the Federal Reserve Bank of New York have been thinking about how to deal with the four largest mortgage lenders if Fannie Mae and Freddie Mac were converted into mortgage securitization cooperatives.
They would like to place two of the largest players (Wells Fargo and Citigroup, for instance) into one co-op and Bank of America and JPMorgan Chase into another.
“We would prefer to have a couple of the big players together to counterbalance each other within these co-ops,” said Joseph Tracy, executive vice president at the New York Fed. He stressed that he was presenting his personal views and not those of the Federal Reserve’s.
These pairings would also create “some competitive pressure” between the two co-ops, he told National Mortgage News after speaking at a recent conference sponsored by the National Association of Business Economics.
Tracy acknowledged, however, that it will be difficult to address the concentration in mort gage lending that exists today no matter how the GSEs are restructured—due to the economies of scale in the mortgage business.
But setting up a governance structure that assures small lenders have “fair access” to the cooperative would help. He noted that cooperatives like Federal Home Loan Banks do not give their largest members voting rights proportional to their size or amount of FHLB stock they own.
Tracy, along with four other New York Federal Reserve Bank economists, discussed the co-op approach in a staff report called “A Private Lender Cooperative Model for Residential Mortgage Finance.” (The white paper was actually published last summer.)
Mortgage Bankers Association chief economist Jay Brinkmann said the pricing strategies that Fannie and Freddie pursued contributed to the concentration of mortgage lending within the largest banks.
The GSEs offered reduced “guarantee fees” for their largest customers, which placed smaller lenders at a competitive “disadvantage,” he told the NABE annual conference. The MBA wants to replace Fannie and Freddie with the creation of six to 10 mortgage credit-guarantor entities or what they call “McGEs.”
These government-chartered McGEs could have different business models, which the MBA says will increase competition and flexibility on the origination side. Some McGEs could focus on small banks and mortgage lenders, Brinkmann said, and “offer them the type of pricing that up to this point was only available to the largest lenders.”
Instead of securitizing entire loans, some institutions might form a McGE to retain a portion of the risk on their balance sheets. But the MBA chief economist raised concerns about the cooperative model. “We would not want to see that as the exclusive model,” he said.
The MBA contends that cooperatives have a downside due to long-term-shared liabilities, which can become an issue when a member wants to leave the co-op. “It’s a lot easier to check into a credit co-op than to check out,” Brinkmann said.
The New York Fed executive said the MBA’s proposal and the co-op structure he favors are not that far apart. If policy makers can agree soon on a design to replace Fannie and Fannie, “you could achieve some material changes in five years,” he told NABE attendees.
“If you put off the tough design decisions until after 2012, it’s hard to imagine” much progress by 2015, he said. Tracy also is a senior advisor to the president of the New York Federal Reserve Bank.
