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Small-lender trade groups blast GSE plan

Two community mortgage-lender trade associations say they have serious concerns about a recent report on how a government-sponsored enterprise (GSE) reform bill is evolving in the U.S. Senate Committee on Banking, Housing & Urban Affairs.  

The nonbank Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA) — two small-lender associations that previously aligned with progressive groups against past GSE reform proposals — say they won’t support a bill that creates several new chartered enterprises and moves far away from the current system dominated by Fannie Mae and Freddie Mac.

GSEfinance“Some of the directions that we are seeing are problematic for small-lending groups, and are problematic for affordable housing groups in terms of a commitment to low- and moderate-income borrowers,” CHLA Executive Director Scott Olson told Scotsman Guide News. “If you have significant opposition from one or both of those groups, then that will be a problem in terms of getting a bi-partisan bill passed.”

The Senate banking committee has produced a draft bill. Based on unnamed sources familiar with the evolving document, American Banker reported this week that that the bill envisions a multi-guarantor system, where several private companies would purchase and securitize mortgages.

Notably, according to an American Banker article published on Wednesday, this would not adopt a utility model for the GSEs. Under a utility model, Fannie Mae and Freddie Mac’s returns would be closely regulated, and they wouldn’t have the incentive to take many business risks.

“The FHFA’s plan would reconstitute Fannie and Freddie from wards of the state to private shareholder-owned corporations,” the American Banker reported. The GSEs would be put into receivership and their charters would be repealed.

“However, sources say the Senate proposal provides that the remnants of Fannie and Freddie could emerge with similar characteristics as the two current companies,” the article continued. “They would be remade into private guarantors and allowed to build capital from investors. It also envisions that Fannie and Freddie’s successors and other competing guarantors would issue a single mortgage-backed security using the Common Securitization Platform that Fannie and Freddie are currently building under the oversight of the FHFA.”

The article also reported that Senators were debating how many guarantors to allow, with some arguing for more than 10.

The bill hasn’t been released, and the committee has not held any recent public hearings on GSE reform. Olson and CMLA’s Acting Executive Director Rob Zimmer said they haven’t yet seen the text of the bill.

Both trade groups are concerned that a system with multiple private companies could come to be dominated by nation’s biggest banks. Olson said the heavy competition might also result “in a race to the bottom” where risky loans get sold and securitized with some form of a government guarantee. Small-lender trade groups want assured equal access to the secondary market, with no price discrimination through volume discounts.

"The six small lender organizations testifying in front of Senate banking committee in July 2017 aligned quite well on what needs to be done in the secondary mortgage market: Make these guys utilities, probably more guarantors is not a good idea,” Zimmer said during a telephone interview. “To my knowledge, none of these organizations have been brought into the discussions on this new proposal, and neither have civil rights and consumer organizations."


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