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Small lenders grab spotlight on reform debate

Small lenders testifying before a U.S. Senate banking committee hearing on Thursday cautioned policymakers not to overthrow a housing finance system that has kept them in business and competitive with the nation’s big banks.

Six speakers representing small banks and credit unions testified that the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac are crucially important entities to them, providing a means to compete in the home-loan market on an equal footing with large lenders.

gsereformbillThe Senate committee, which is expected to produce a GSE reform bill possibly as early as this year, held its second hearing within a month. Both political parties have committed to working out a bipartisan measure that would end the nearly nine-year federal conservatorship of Fannie and Freddie. Small lenders could hold considerable sway over the final version of the bill. 

Fannie and Freddie finance just over half of all home mortgages by purchasing loans from lenders and bundling those loans into securities. They are also the most important players in bankrolling affordable apartments.

In 2008, the government bailed out the two enterprises and placed them in conservatorship because they were facing bankruptcy. Almost all of their business decisions are controlled by the government, and most of their quarterly profits are swept up by the U.S. Treasury. Congress made a couple of attempts during the Obama administration to reform the system, but the bills never advanced. 

Speakers at Thursday's hearing testified on behalf of the American Bankers Association (ABA), Credit Union National Association (CUNA), the National Association of Federally-Insured Credit Unions (NAFCU), the Independent Community Bankers of America (ICBA), the Community Mortgage Lenders of America (CMLA) and Community Home Lenders Association (CHLA).

Notably, all the speakers were opposed to creating a system with several GSEs in operation. The Mortgage Bankers Association (MBA) has proposed rechartering Fannie and Freddie as private utilities, and allowing the government to charter other companies to compete with them. Small-lender trade associations tend to favor the idea of adopting a utility model for the two existing GSEs, where the prices and business decisions would be tightly regulated. None of the speakers were in favor of multiple GSEs, however.

“I would say that you had two that worked fairly well for 70 years until they started straying from their mission,” said Charles Purvis, president and CEO of Coastal Federal Credit Union, who was speaking on behalf of NAFCU. “I don’t think it is necessary.”

The small lender groups agree on several core points. Speakers all advocated for a system that preserves the GSE “cash window,” allowing lenders to sell loans to the GSEs and maintain servicing rights. All want Congress to mandate that the GSEs maintain a level playing field, with equal pricing and no volume discounts to the big banks.

Speakers also indicated that any new system would likely need to ban large banks from engaging in both the business of originating mortgages to consumers and the business of purchasing and securitizing loans that would contain a government guarantee.

Lenders support a system that provides an explicit government guarantee to GSE securities in the event of catastrophic losses, with layers of private capital standing in front of that backing.

Small lenders disagree on the issue of recapitalizing Fannie and Freddie. ICBA, CMLA and CHLA have all advocated for the GSE regulator, the Federal Housing Finance Agency, to withhold dividend payments, and allow the enterprises to build up buffers to avoid future draws on the Treasury. ABA and other banking groups have opposed that. 


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