American Banker recently ran an opinion piece written by a member of a large, mortgage industry trade association touting that trade association’s plan for reforming the government-sponsored enterprises as being good for small lenders. I am a senior executive of a small lender, and a member of the board of directors of a small-lender trade association.
I can tell you from this small lender’s point of view that most of the various GSE reform proposals that have been offered, in very clever and disguised ways, are designed to advance the interests of the big-bank lenders and their Wall Street enablers, at the expense of companies like mine and the consumers whose mortgage needs we serve. It even places the American taxpayer at risk as will be explained later.
So yes, GSE reform, if done the wrong way, would be bad for small lenders, our customers and even hardworking Americans otherwise not involved in the mortgage and real estate industry.
Here are the concerns of small lenders in a nutshell.
We currently have a level playing field and a truly competitive mortgage market for the first time in a generation. This is due to an extremely helpful legal provision enacted by Congress in 2011 mandating equal guarantee fee pricing by Fannie Mae and Freddie Mac for all lenders. The GSEs’ regulator and conservator, the Federal Housing Finance Agency, has employed this legal provision to eliminate the previously harmful practice by Fannie and Freddie of granting volume discounts on their loan guarantee fees to large, primarily bank-owned lenders.
Any GSE reform proposal should leave small lenders and their customers in at least as good a position as they are now, and it should do so in a targeted fashion, so that we do not disrupt the current ways that our mortgage markets are working successfully to provide consumers with affordable mortgages. Sadly, most of these GSE reform proposals fall far short of that.
Let me give you a few examples of proposals that are being touted as equitable, but in fact are not.
While the plan proposed by the Mortgage Bankers Association would extend the prohibition on unequal pricing, it is silent on policing a tool the big banks can use to achieve the same objective as volume discounts: upfront risk-sharing. While this tool is great in theory, through the use of upfront risk-sharing the big-bank lenders could employ a variety of complicated financial structures that would minimize their own risk exposure while still affording them the same advantages they formerly had under volume discounts.
The MBA’s plan is silent on this issue, but as crafted it would provide a huge loophole to the big banks and Wall Street. With little risk actually being assumed by these banks, risky lending practices are sure to ensue for the sake of profit. The memory of the financial crisis is too recent to let this happen again.
More directly, the MBA’s plan would allow a consortium of big-bank lenders to form their own direct competitor to Fannie and Freddie that would be authorized to issue mortgage-backed securities with a full-faith-and-credit guarantee from the federal government, a.k.a. the American taxpayer. And since these securities would carry this guarantee, the banks could buy these securities and hold zero capital against their investments. Can you imagine the type of leveraging and fancy financial structures the big banks and Wall Street investors could employ with massive holdings of zero-capital mortgage securities?
So, yes, we small lenders, and the trade associations that truly represent our interests, are extremely concerned about these various GSE reform proposals. Existing law gives the FHFA ample authority to complete much of what remains to be done in GSE reform — establishing strong capital standards for the GSEs and requiring Fannie and Freddie to draw up and execute a plan successfully to achieve the required capital levels. This is current law, which is not being followed.
All we really need to complete GSE reform is a handful of amendments to existing law that would do three things: make permanent the FHFA’s authority to regulate Fannie and Freddie’s guarantee fees and to ensure those fees are equal for all lenders; extend that same permanent regulatory authority to all upfront risk-sharing transactions and all other fees and charges imposed upon lenders or on a per-loan basis; and require that the Treasury preferred stock purchase agreement be made permanent and that Fannie and Freddie pay a reasonable ongoing fee to the Treasury for the agreement. This latter point would provide explicit, paid for, federal backing to the GSEs, giving mortgage-backed security purchasers the assurance they need their investments are secure. We now have one of the most secure and healthy housing markets in history. Little change is necessary in order to maintain and expand the market so that all who qualify for housing credit receive a mortgage.
Given the narrow scope of what many small lenders believe is truly needed to complete GSE reform, it is easy to understand why we look with suspicion and distrust on the elaborate plans coming forth from trade associations and think tanks that purport to address the concerns of small lenders that go well beyond what is necessary to permanently reform the GSEs.