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Policy experts' GSE reform plan would benefit big banks, community lenders say

A trade group that represents small lenders says a proposal to turn Fannie Mae and Freddie Mac into a single government corporation would cede control of the mortgage markets to the big banks.

The Community Lenders of America (CMLA) slammed a government-sponsored enterprise (GSE) reform plan released last month by a group of policy experts and released a competing plan.

In March, five analysts led by former White House advisor Jim Parrott and Moody’s Analytics Chief Economist Mark Zandi rolled out their plan called “A More Promising Road to GSE Reform.”

Under that vision, a new corporation would take over the GSE functions of purchasing and securitizing loans. The government would provide an explicit government guarantee on mortgage-backed securities, but the new entity would be required to transfer all of the noncatastrophic credit risk to private entities.

The goal of the plan is to create greater capital liquidity with less government involvement in the mortgage market and to include a wide mix of small and large lenders. In an interview with Scotsman Guide last month, one of the authors, former Fannie Mae executive Barry Zigas, said that a single-entity system would naturally grow out of the work being done by the GSEs to create a common securitization platform. 

CMLA Executive Director Glen Corso said, however, that the proposal would have the practical effect of squeezing out small lenders and creating a system dominated by big banks.

“Basically, the Parrott and Zandi proposal wants to go back to those days,” Corso said. “I am baffled as to why they want to do that, but clearly they do.”

Corso said that CMLA’s members are most concerned that a newly created entity would play a much smaller role in purchasing loans, which has been the primary source of liquidity for small lenders.

Corso said Fannie and Freddie stopped the pricing discrimination against smaller lenders while under government control, enabling smaller players to compete and gain market share. Without Fannie and Freddie, he said, big banks would inevitably dominate both the retail market and the secondary market.

The CMLA’s plan envisions a major role for Fannie and Freddie. The GSEs would be strongly recapitalized and eventually released from government conservatorship with an explicit government guarantee, but turned into quasi-utilities under strict regulation with little opportunity to take big risks.

Corso said that this approach would be less disruptive and more easily achieved.

“When we look at GSE reform, we say that we have a good situation right now,” Corso said. “We perfectly understand that you can’t continue conservatorship forever, and so what is the least disruptive way that we can achieve taking the GSEs out of conservatorship while, at the same time, making sure that we have addressed all the issues that caused them to enter into conservatorship in the first place? That is really what our policy is all about.”

GSE reform returns from the dead

Most analysts say that there is no chance that Congress will take up GSE reform until the next administration, and the prospects for extensive reforms are also uncertain after the new president takes office. GSE reform proposals have flowered in recent weeks, however.  

This month, the Washington, D.C.-based think tank the Urban Institute published four essays from policy experts with competing visions. The Urban Institute has taken sides on housing reform in the past, and Jim Parrott is a senior fellow with the Institute.

Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center, said the center plans to take no position on any of the plans outlined in the essays. She said all these proposals have some similarities, and the hope is to narrow the range of options.

“We don’t think that this is going to trigger reform or anything like that, but hopefully the idea is to get everybody more on the same page when these issues begin to be addressed,” Goodman said.

“It is an important issue and there is no way we could not lend our platform to this." 


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