As the Senate Banking Committee seeks to revive talks over reforming the government-sponsored enterprises, a central question is the extent to which it will take into account small, independent mortgage bankers. Will they create an equal housing finance playing field, or instead create a system that favors “too big to fail” banks, thereby crushing smaller lenders?
By all accounts, the financial crisis led to even further consolidation by the big banks. The bailouts infused Wall Street companies with billions of dollars of taxpayer funds, and mergers forced by the government made TBTF firms even bigger. Today, the systemic risk posed by these banks is arguably bigger than it was before the crisis.
Thankfully, smaller firms are still competitive in the mortgage space, and this is largely due to the work of the Federal Housing Finance Agency. With Fannie Mae and Freddie Mac operating more like public utilities controlled by the government than private companies, the FHFA has done an excellent job during this period fostering competition. The agency virtually ended faulty practices like preferred pricing to large lenders, and opened up access to a broad range of companies — particularly community-based independent mortgage lenders — so consumers are better-served.
The FHFA has also staked out a solid position on the GSEs’ capital situation. Last month, FHFA Director Mel Watt said he was open to taking steps unilaterally to rebuild Fannie and Freddie’s capital — to avoid a Treasury advance — if Congress is unable to enact a reform plan. His comments drew criticism from senators as well as Mortgage Bankers Association Chief Executive David Stevens, who was quoted as saying that Watt’s remarks were “tantamount to creating panic at a time that’s not needed.”
I applaud Watt for taking a stand. Letting the GSEs’ capital fall to zero is not good for anyone.
The MBA argues that letting the GSEs hold on to capital will result in the so-called “recapitalization and release” scenario — in which Fannie and Freddie are allowed to turn back to their former selves. But this dismisses the risks of letting the GSEs become undercapitalized. And the key lesson we learned from 2008 is that if another crisis occurs, once again the winners will be the TBTF financial institutions.
The MBA does a good job at many things. However, ultimately they are heavily influenced by the TBTF financial institutions. Those institutions have the resources to wield influence in Washington, while entrepreneurs like me are simply trying to keep up with our customers’ credit demands.
The MBA promotes a “one voice” motto for the mortgage industry. While solidarity can be beneficial in many areas, this is not a one-size-fits-all industry, and the choices Washington faces reflect competing, and in many ways, contradictory interests.
With a new administration and new Congress looking housing finance, we have the opportunity to get GSE reform right. This means recognizing the efforts smaller, independent lenders have made to expand mortgage credit access to consumers. These lenders are unnoticed, overlooked, outnumbered and overpowered by the TBTF financial institutions. Yet our voices need to be heard.
Democracy only works when everyone gets involved. This is a crucial period for housing finance in America. As decisions get made, we need to make sure all stakeholders have a seat at the table.