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Groups ask senators to nix piecemeal GSE reform

Two community mortgage-lender associations say a movement is afoot in the U.S. Senate to slip in piecemeal reforms to Fannie Mae and Freddie Mac that could potentially benefit the nation’s biggest banks.

In a letter this month to the leaders of the Senate Banking Committee, the Community Mortgage Lenders of America (CMLA) and the Community Home Lenders Association (CHLA), along with five other groups, asked senators to kill any GSE-related attachments to budget bills this year. Congress is debating a temporary bill to fund the government through the end of the year, and also must pass a budget through fiscal 2017.   

GSE letterSpecifically, the groups are concerned that riders will be introduced that will mandate new risk-sharing models, including expanding the role of private insurers in covering the default risk of home loans. They also are against any proposal that would create a standalone corporation that would own and oversee a new securities platform for the government-sponsored enterprises (GSEs) Fannie and Freddie.

“We picked up intelligence on the Hill that certain senators are considering adding a couple of provisions dealing with the GSEs,” CMLA Executive Director Glen Corso told Scotsman Guide News on Friday. “We, and other cosigners of the letter, think that is a very bad idea for Congress to mandate both of those things.”

Fannie and Freddie, along with their regulator, the Federal Housing Finance Agency (FHFA), have been developing a common securities platform and will eventually roll out a common security. As for risk sharing, Fannie and Freddie have been offloading most of the credit risk on their loans through back-end deals involving sales of securities to a select few investors.

FHFA recently sought input from the industry on developing so-called front-end risk sharing models, which de-risk the loan prior to Fannie and Freddie purchasing it. One of the leading options would be for private insurers to cover a greater portion of the default risk.

The letter says ideas for risk sharing have not been fully debated in Congress and “do not enjoy broad support or consensus.” The Mortgage Bankers Association (MBA) and the U.S. Mortgage Insurers, among other lender groups, have advocated for upfront risk sharing, and expanding the role for private insurance. 

U.S. Mortgage Insurers President Lindsey Johnson said expanding the role of private insurers would be good for small lenders. She didn't address the speculation that a specific proposal might soon be floated in the Senate. 

“The proposal to deepen the use of MI [mortgage insurance] to shift more risk away from taxpayers works well for small lenders because MI is already part of their current credit-origination processes and is available with transparent pricing,” Johnson said. She also noted that other proposed risk-sharing models would require lenders to post collateral that would be “impractically expensive and unavailable to smaller loan originators such as community and midsized banks.” 

Corso said that CMLA supports a pilot program that would try out deeper coverage by private insurers. Small lenders are worried, however, that big banks will take advantage of upfront risk sharing to gain a market advantage in doing business with Fannie and Freddie.

“We are just concerned that there might be an opportunity for large banks to utilize their direct access to the capital markets to create these structures for upfront risk sharing, where they don’t really take on much risk, but they get a reduced guarantee fee,” Corso said. “All of a sudden we are back to the pre-2008 days, where the big guys are getting a price break from Fannie and Freddie, and the little guys aren’t.”

Corso said small lenders are “deeply suspicious” of any proposal that would create an independent corporation overseeing the common securities platform, as its board would likely be controlled by the nation’s largest banks. CMLA and the other groups want the GSEs to retain control of the platform.  

The NAACP, the National Community Reinvestment Coalition, the Corporation for Enterprise Development, Leading Builders of America, and the Leadership Conference on Civil and Human Rights also signed the letter. 


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