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Small lenders have a big stake in GSE reform

A U.S. Senate banking committee hearing last week made it clear that reform of the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac is back on the congressional agenda. It also appears that smaller and mid-sized lenders could hold considerable influence over how the bill will take shape. Adam Thorpe, president and chief executive officer of Castle & Cooke Mortgage, a nonbank lender doing business in 30 states, spoke with Scotsman Guide News about what features of a new system would be considered critical for independent lenders, and what would be deal breakers.    

As a lender, are you concerned about how the GSE reform may take shape?

ThorpeYes, I am very concerned. Independent lenders have directly benefited from many of the administrative actions taken by the [Federal Housing Finance Agency, or FHFA] while acting as the GSE conservator --- things such as leveling guarantee fees, the elimination of special deals for volume players and creating a single security. These changes have had a positive impact on our business and, with GSE reform, they could be reversed. So, I am concerned with the way that GSE reform could take shape, that many of benefits that we have seen over the past few years could be eliminated.

Does a significant amount of your business depend on the GSEs?

Absolutely. Approximately 50 percent of our [closed loans] would be sold in one way, shape or form to the GSEs.  

Could you explain what the “cash window” is and why certain small-lender associations have said that it is crucial that it be preserved?

Lenders that are approved by Fannie Mae and Freddie Mac have the option to sell closed loans directly to Fannie or Freddie in exchange for cash. That would be a cash-window sale. The other option would be swapping those closed loans for mortgage-backed securities.

When independent banks sell loans via the cash windows, the GSEs aggregate those loans to form a pool, and then they securitize them into a mortgage-backed security. An independent lender like ourselves would choose to sell loans to the cash window for many reasons. Most of them are oriented around speed and efficiency. First, selling to the cash window is a relatively fast transaction. It allows independent lenders to turn loans faster, which shortens the amount of time that loans sit on a warehouse line. Selling loans to the cash window —  because of the speed of the transactions — allows us to better predict cash flows in our business. Another benefit is that selling loans to the cash window allows us to retain servicing and our customer relationship with the borrowers. That is critical as we grow our business.

Are you concerned about the big banks taking over the market again? And, if so, under what reform scenario could that occur?

I am absolutely concerned about that. Most big banks have deep balance sheets, and they have the infrastructure and capability to run their own securitization businesses. If they are given an advantage through GSE reform, small independent lenders could become reliant on them in order to sell loans into the secondary market. If this happens, big banks will be given a big advantage to dominate the market.

What are some features of a new system that would be considered critical for a smaller lender?

Well, as to the big picture, it is critical that independent lenders like ourselves continue to have equal access to the secondary market. That access should be transparent and nondiscriminatory. I would really like to see Congress lock in the positive changes that have occurred over the past five years, and have the secondary market evolve into more of a utility-style environment, where small lenders are granted equal access to the secondary market. I would also like to see measures put in place that would prevent a return to the volume-based discounts, credit waivers and other advantages that were given to larger players. That is one of the things that the evolution over the past few years has really worked to our benefit. It has leveled the playing field. I would also like to see some assurances put into place that we have options to sell loans in a quick and efficient manner, including maintaining the cash window.

Are you optimistic that GSE reform will happen over the next two years?

I am cautiously optimistic that something will happen. GSE reform will require a significant bipartisan effort, and it is going to require all stakeholders in the business being involved in the process. The unfortunate reality of our current environment is that our current administration has created some significant waves, and has some adversaries on both sides of the aisle. Some of those items would have to be worked out. Everyone is going to have to come to the table and understand that this is going to require all parties to be involved. I am not sure, in the current environment, that we are there yet.  


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