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Housing-finance system doesn't need big fix

Housing-finance reform is back on the Congressional agenda, and small lenders could hold considerable sway over what form the legislation takes. Glen Corso, executive director of the Community Mortgage Lenders of America (CMLA), spoke with Scotsman Guide News about where small lenders stand on the issues.  

Why do CMLA and other lender groups that primarily represent small lenders want Fannie Mae and Freddie Mac preserved?

The system currently is working very well for small lenders and the borrowers that they serve in the various communities that they operate in. The small lenders feel that they can get for their borrowers affordable financing on good terms by selling their loans either to Fannie or to Freddie, and to bring those terms to their borrowers.

So, what is the problem with having multiple Fannie and Freddie entities competing against each other, as has been proposed by the Mortgage Bankers Association (MBA)?  

corsoWell, two things with that. First, the small lenders in our group say they have their hands full right now keeping up with the requirements for two different organizations, Fannie Mae and Freddie Mac. They really don’t want to have to cope with — nor do they see the need — for having a third or a fourth organization that they would then have to start grappling with their guidelines, and rules and regulations. Probably more importantly, the MBA proposal is structured so that a consortium of large lenders, like the big banks, could capitalize and start their own GSE [government-sponsored enterprise]. By doing that, they can once again start to dominate the primary mortgage market because they will have a special in-road into the secondary market through their partial ownership of a GSE. That is the last thing that we want to have.

Do you have a problem with the idea of turning Fannie and Freddie into utilities, where their prices would be tightly regulated?

No. As a matter of fact, we are definitely in favor of that. In the law, there is a requirement that Fannie and Freddie charge equal prices to lenders of all sizes. When Congress passed that law back in 2011, they put a 10-year sunset on it. So it expires in 2021. Small lenders would like to see that sunset removed, so it becomes a permanent law.

What does Congress need to do in legislating reforms, if anything?

There are a couple of things for Congress to do. No. 1 is, as I mentioned, make that requirement of equal pricing permanent [and] extend it to upfront risk-sharing arrangements. Our small lenders are very concerned that if the GSEs did a lot of upfront risk sharing — other than with mortgage insurance policies [through private insurers] — there would be an opportunity for big lenders to once again game the system and get back the advantage they used to have six or seven years ago.

And then, third, make permanent some kind of federal backstop for the GSEs, so that their securities will continue to command favorable prices in the marketplace, which translates to low interest rates for borrowers.

Is it possible for Fannie and Freddie to be recapitalized and released if Congress can’t get anything done?

Certainly the law that exists today gives the regulator, the FHFA [Federal Housing Finance Agency], the authority to set capital standards for the GSEs, which they have not yet done, and to make those tough capital standards; and then to direct the GSEs to draw up a plan on how they are going to meet those capital standards, and then actually oversee them as they take the steps to meet it. We think that having some kind of a federal backstop and making the requirement of equal pricing for all lenders permanent are necessary components of recapitalizing and releasing the GSEs from conservatorship.  

How do you respond to the charge that it is ridiculous to worry about the GSEs' disminishing capital buffers, when they have what is effectively a massive line of credit from the government?

We say two things. The first is that we think that they are running on such thin and disappearing capital spreads [that it] really inhibits them from taking appropriate risks in their credit standards. We think they are unduly tight credit standards because they don’t have any capital; and therefore, are so frenetic about a single misstep. But then second, the fact is lines of credit are not capital. The overwhelming lesson that our small lenders learned from the financial crisis in ’08 is that those that are strongly capitalized with ample capital survive a crisis, while those that are not, don’t survive. They [small lenders] think it is frankly insane that we are running the two biggest mortgage organizations in the country on what will soon be zero capital. 

Is there a good chance that FHFA Director Mel Watt will allow the GSEs to retain this quarter’s dividend payment, or any dividend payments that might come in the third or fourth quarters?

We certainly hope that he will take the appropriate steps to allow them to build a capital buffer, so that we don’t have a one calendar-quarter hiccup, where they [the GSEs] didn’t quite get their hedging right and it causes a loss, which causes another draw on the line of credit. We think that just gives ammunition to that group of people who are very anti-Fannie and Freddie and would like to put them out of business.

So, how do you see things shaking out this year?

My sense is that the support for broad legislation that remakes the mortgage market, or does considerable changes to Fannie or Freddie, we don’t think the support is there in the Senate. The Senate is the body that is looking at it right now. We don’t think the Senate Banking Committee has majority support for broad, sweeping changes. We are hopeful and optimistic that once the banking committee goes through that exercise  — and everybody figures out that [they] don’t really have the support —  that they will see the wisdom of the agenda being put forth by small lenders of doing a very narrowly tailored, very specific bill that addresses those couple of issues that I raised about the federal backstop and equal pricing. Let’s get that done, and then let’s have Director Mel Watt and FHFA exercise their authority to establish capital standards [and] have the GSEs draw up a plan. 


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