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Trade group: America doesn’t need multiple GSEs

Housing-finance reform and ending the federal conservatorship of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac has become a hot topic again. The mortgage lobby, however, remains split on the direction of reform. Scott Olson, executive director of nonbank trade group the Community Home Lenders Association (CHLA) discusses why his group opposes a large-scale overhaul of the system, including proposals to create multiple GSE-like entities.

It has been CHLA’s position that the current status quo conservatorship of Fannie and Freddie is unsustainable. Do you believe there needs to be a legislative solution driven by Congress?

olsonqa(1)There are certain things that need to have a legislative solution. No. 1, you need some sort of federal guarantee, whether it is an MBS [mortgage-backed security] style guarantee or some sort of line of credit, but there needs to be that. No. 2, we believe that the g-fee [guarantee fee] parity and other sort of small-lender equal treatment provisions which [Federal Housing Finance Agency, or FHFA, Director Mel Watt] has put in place administratively should be codified.

They don’t have to be, but we believe they should be. And No. 3, I think it is a good thing for Congress to ratify the policy, so the regulator has direction and knows he can move in a particular direction with the consent of the governing body, and that we are not going to turn left this week and right the following week. There are a whole raft of reforms that have taken place to date, and we ought to codify them.

According to reports, there may be GSE reform bills released imminently. The draft Senate bill proposes the creation of multiple GSE-like entities that purchase and securitize mortgages? Why does CHLA oppose such a system?

There is a lot of consensus about this among small lender groups. If you go back to the hearing [before the Senate banking committee] last July, our president who testified said there should not be additional guarantors. Each of the other small-lender groups at the hearing agreed with that. We put out a document last week, a two-pager that explains that in depth, but also provides specific examples. The cornerstone of this is simply that we want to make sure that a cash window is preserved. 

Equally important [to be preserved] is the ability of small and midsize lenders to securitize loans through the market by going to broker dealers and executing pools of loans. We listed in this document a whole range of things that could happen if you move down this road to multiple guarantors. One of the main concerns is about vertical integration. If you allow a Wall Street bank holding company to hold any interest in a guarantor, we are very concerned that the guarantor would be operated in the interest of that bank lender or other large lenders. That is just one example, but there is a whole raft of other ones.

What we are saying is that Fannie and Freddie have done a good job of providing access on both those fronts to small and midsize lenders. They need to be preserved and recapitalized. The other thing I would say is that this concept is sold on the basis of competition. Well, our approach has plenty of competition. It is just that it is centered where we think it should be. It is competition among loan originators. It is competition in the market for credit risk transfers. Right now we have a great after market, where they do back-end risk sharing. There is competition among the securities dealers executing  these loans. So, we believe in competition, but the problem is that if you proliferate that at the guarantor level, you create a lot of problems. There are other reasons. No. 1, small lenders are going to have trouble interfacing with a raft of new guarantors. That way we may be relegated to working with second-tier guarantors that aren’t as competitive.

What do say about a warning right now that has been raised by advocates of reform, who say if Congress doesn’t get a bill moving, the Trump administration will soon appoint a much more conservative conservator, who may take steps to shrink Fannie and Freddie’s footprint.

Well, if you looked at the predecessor to Mr. Watt, Mr. DeMarco, [former FHFA Acting Director Ed DeMarco] clearly believed in and wanted to explore ways to shrink their footprint. It obviously is a concern, but at the same time, we trust the administration. We don’t think they are going to take steps that will dramatically reduce the footprint of mortgage loans. It is such an important part of the economy. We have just come off a tax bill that reduced tax breaks for homeownership. Is there a concern? Of course. But we don’t quite understand why that would be a reason to go out and rush a bill, or to put out a bill that we think moves in the wrong direction.

So, what is the blueprint to get out of the conservatorship?

We believe the blueprint is pretty simple and we have been outlining it for two years. No. 1, Congress should adopt these reforms [that have been developed administratively under the direction of the FHFA during the conservatorship]. No. 2, we think there should be some determination of what the federal guarantee should look like, whether it should be a wrap of MBS or should it be some form of sustaining support, like the current line of credit. No. 3, authorize Fannie and Freddie to move forward and start to recapitalize.

Congress could do all that in what you could call a mini-GSE bill. If we want to have a debate on whether there needs to be more competition to Fannie and Freddie, we can have that debate, but it has to be a debate on what those competitors would look like. For example, if you had large insurance companies that aren’t in the secondary origination market, and there will be strong protections that ensure that they treat people equally, then we would be much more open to that. But we are not clear that there is evidence that there isn’t a competitive market with Fannie and Freddie already.  We think that we should start with these baby steps, but important steps, and then we can move on from there. Jumping off with a large bill that goes off in a completely new direction creates a bunch of things that we don’t know what they are going to mean. That presents a risk to the market.

Minimum, how many years are we talking about to end the current state of affairs?

No matter what happens, it is five to 10 years before everything is fully stabilized. That doesn’t mean that we shouldn’t make progress in the right direction. If you began to recapitalize Fannie and Freddie, people will say, "Oh, well, it is going to take however many years: two years, five years, 10 years, whatever. That is horrible with that uncertainty." Well, it is a lot better to have them have capital building up for two years, and reach that point, and have that kind of taxpayer protection, than have nothing.

We have taken several years where we could have been building capital, and we haven’t done it. So, let’s not have the perfect be the enemy of the good. It is going to take a while before anything is settled, but we need to be moving in the right direction. Doing things like codifying these reforms and having them begin to rebuild capital is very good progress, whether it takes however many years it takes to get to what people would consider a final end state.


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