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MBA's reform plan protects small lenders


The Senate banking committee resumed its hearings on Thursday on reform of the government-sponsored enterprises Fannie Mae and Freddie Mac. Ahead of the latest hearing, David Stevens, president and chief executive officer of the Mortgage Bankers Association (MBA) spoke with Scotsman Guide News about GSE reform. Stevens testified on June 29 before the Senate committee in support of MBA’s plan to re-charter the GSEs as strongly regulated private utilities, and create a system with potentially several similar companies competing for business in the secondary market.

Why does MBA advocate for multiple GSE entities?

stevenstestimonyWell, one thing that we have learned with the duopoly of Fannie Mae and Freddie Mac is that it has created an environment where they almost behave like a monopoly. In many instances, they almost act like a single entity, and they allocate market share to each other as though it was almost planned. We want real competition in a future state. Compare it to the mortgage insurance business.

There are seven MI companies out there all competing for the lenders’ business, and that forces them to be much more transparent in pricing, more creative in customer service tools, contract underwriting, technological and operational capabilities, reps and warrants and more. When you only have a two-company duopoly, it is very non-transparent. So that is why most lenders in this county have no idea what is happening in the credit-risk transfer structures.

They are very complex and oftentimes they are only executed with a single lender, typically a large one, and it creates a great amount of risk for putting smaller lenders in a less competitive environment. Just like when you have a lot of people competing for any of your business, you end up creating the best price transparency and usually the lowest price that is allowed in the market. There is a real threat that, if they don’t do right by you, you can go to another company. Today, it is much more difficult for that to happen.

Why would smaller lenders have nothing to fear from the MBA plan?

Quite frankly, I think small lenders should fear not doing legislative reform. The greatest fear that small lenders should have is to allow this duopoly to return to its original state. Keep in mind, and this is fact, between 1998 and 2010, the market share of the 10 largest single-family originators in this country rose from 40 percent to almost 80 percent. That was done because the GSEs, when they needed market share, it was a whole lot easier to go cut a deal with one big lender than to drop G-fees for a thousand lenders.

What we saw pre-conservatorship was what were known as alliance deals at the time. They would cut a deal with a Countrywide or Washington Mutual or whoever it would be who was big at the time for all their business, and they would give them a guarantee fee that was, at times, 20 basis points lower than what they were giving their smaller lenders. I personally know this because in 2011 when I first came to MBA, I brought three small independent mortgage bankers to meet with Ed DeMarco [former acting director, Federal Housing Finance Agency], followed by several letters both to the regulator and to the Hill, calling for level guarantee fees. Even in 2011, they were not level. Bigger institutions were getting better deals. It wasn’t just in price, but in credit terms. So, you release these guys back to their original state, the only thing that is protecting you is the hope that the regulator is going to do a good job. Because, unless you lock in the level playing field legislatively, we are going right back to the way things were for the couple decades prior to the failing of these two companies.

If you read our plan, it starts in great length with an overview of why small-lender access is preserved. It starts with public, transparent pricing, with no special deals for any lender, large, small, it all has to be evenly priced, just like you get in a Ginnie Mae program and with the FHA program. That is not the way it has been in the past — no special credit deals for anybody, no deals for market share. It retains all of the execution options, cash window, securitization, leaving lenders large and small the ability to transact with a future guarantor any way they want, but it locks it in by legislation, not by the whim of the regulator.

Why is MBA against allowing the GSEs to retain some of their earnings and build up a small buffer to avoid draws on the Treasury line?

Because it is a diversion. They don’t need a buffer. They have got $240 billion in a line of credit, and there is absolutely no reason. In my view, people who are focusing [on this] are being prodded by the hedge funds, who just want to delay this thing in the hopes that they can recap and release, and make a big profit on the stock at the expense of what will really be small lenders. I, quite frankly, think they duped these unsophisticated and less effective organizations to buy into these lies. I don’t know why people are worried about capital. Allow them to retain a couple of billion dollars on top of $240 billion that already sits there for them?

It is an absolute ridiculous sideshow that diverts attention on our need to get this done, beat the clock, so we don’t end up with perhaps a much more conservative regulator, who views the role of government as too large and who won’t necessarily protect the level playing field that we have today. The job at hand is keep pressure on Congress to do legislative reform, create more competition, level the playing field, make it permanent by legislation, and stop falling into false narratives that are being promoted by profit seekers and speculators who bought the shares and hope to make a windfall, which will, quite frankly, come at the expense of lenders and consumers.

Given the divisive political environment, what are the chances of anything getting out of Congress?

Look, the easy bet is to say that Congress can’t get anything done. If you ever come to my office, on my wall, there is a bill that is framed with the President’s pen. It is a piece of legislation that I promoted when I ran FHA [Federal Housing Agency], and it went through Congress at a very difficult time when the Tea Party had come in. There were only four no votes on it. The White House was so excited about it, they gave me a red-lined copy of the bill framed with the President’s pen. I am staring at it right now. You can get stuff done. The interesting thing about GSE reform is that it is not partisan.

Health care, wiping out Obamacare, it hit to the core values of the respective extremes of both parties, one that will defend it to the end of the earth and the other that wants to tear it apart. That became a very partisan divide. To some degree, I think that tax reform could strike into that, or trying to destroy Dodd-Frank. These are things that come with predisposed, partisan divisiveness that makes it very difficult. But Sen. Crapo [Sen. Mike Crapo, R-Idaho, chair of the senate banking committee], and Sen. Brown [Sherrod Brown, D-Ohio, ranking member of the committee] were both very clear that GSE reform is not partisan. It is technical and it is complex in terms of finance.

But, to that end, they both agree that we need to move forward. Even [Sen. Elizabeth Warren, D-Massachusetts] came up to me after the Senate hearing that I testified at a couple of weeks ago, and made it very clear that she is opposed to the duopoly, and wants to do GSE reform. This is one where we have Sens. [Bob Corker, R-Tennessee and Mark Warner, D-Virginia] working together, Democrats and Republicans, where we have Crapo and Johnson [former Sen. Tim Johnson, D-South Dakota], Crapo and Brown, different parties holding joint hearings, joint listening sessions and the White House.

I had a meeting with a very high-level member of the administration a couple of days ago on this subject. He made very clear that he thinks we are going to get it done. It takes commitment in a bipartisan fashion. It takes the White House to commit that they want to get it done.

Do you see any common ground emerging in the industry and among the parties?

Yeah, that is a great question. I am a weird dude, man. I grew up in mortgage banking as a loan rep and ended up running a large regulator as the FHA commissioner, and now running the Mortgage Bankers Association. I am loan rep who somehow got wrapped up into politics. I spend all my life, every day, in politics. I am in the White House frequently. I am in the Treasury Department and I am up on the Hill with members of Congress. As you know, we had one hearing on GSE reform so far, the introductory hearing. They only had three witnesses. It was me, a consumer advocate, Mike Calhoun [president, Center for Responsible Lending] and Ed DeMarco, and that is where they started. I think [the Senate Banking Committee went that] route because they recognize that our plan, the MBA plan, actually represents the entire waterfall of lending in America.

We had multifamily lenders on our taskforce who used Fannie’s program and Freddie’s program, and we had single-family lenders. By the way, out of our 24 members [on the taskforce], only three of them were big banks. The rest were all independent mortgage bankers, community banks, credit unions. We had two subcommittees on the GSE taskforce that wrote the paper. Both were headed by mortgage bankers. We had the banks at the table too. Ultimately, it was a unanimous vote of support at where we ended up. Why this is important is that we have been working with the Senate committee. I have been called to private briefings. I have been to two briefings with the full committee, Democrats and Republicans together in the same room, at their request. One was a panel with other trade groups, like the American Bankers Association, which represents small community banks. They are fully in agreement. They just released a principles document, which looks like it could have been our paper. The home builders are completely in agreement with what we are proposing.

It is clear that [the Senate Banking committee members] view the MBA paper as one that can be considered as core value proposition for a future model. My meetings with both Democrat and Republican leadership on the Hill and those in the administration, the feedback has been great. So, I see them working together and I see them beginning to align around the concepts that are very consistent with our paper or the American Bankers Association principles document, with the home builders principles document, with the National Multifamily Housing Council principles document, and so many others who are not being persuaded, duped into following the efforts of the hedge funds. They are only in this for one thing. If we don’t protect our future by getting good legislation, we are going to end up repeating history. That is what I think we all need to focus on.


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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