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Q&A: Small lender concerns with Crapo's GSE reform plan

This week, a path forward for reforming Fannie Mae and Freddie Mac is once more on the Congress agenda. Senate Banking Committee Chairman Mike Crapo, R-Idaho, kicked off two days of hearings on March 26, touting his plan for moving the two government-sponsored enterprises out of conservatorship.

Crapo’s proposal hinges on Fannie and Freddie transitioning into private guarantors as part of a competitive market that includes other guarantors. Ginnie Mae, under Crapo’s pitch, would backstop payments on securities issued by Fannie and Freddie.

The plan is ambitious given the rocky road that has led to this point, and while Crapo was applauded by a bipartisan audience for his efforts, Congress is no closer to an agreement. Small lenders, such as those represented by the Community Home Lenders Association (CHLA), take particular issue with parts of Crapo’s proposition, and have been vocal in their opposition.

Scotsman Guide spoke with Scott Olson, executive director of the CHLA, to discuss specific pressure points that small lenders see in this latest reform attempt.

ScottOlsonTalk about the proposed GSE reform solution that Sen. Crapo is putting on the table. Is there anything that the CHLA sees as a “keeper” within his proposal?

I think that one of the points that CHLA has been making is that most of the major reforms needed to the GSEs that would have prevented a recurrence of the debacle 10 years ago have actually been done. Things like QMs [qualified mortgages] and no-doc loans, risk sharing and limiting portfolios — the Crapo bill would codify those things, and we think that's a good thing. We think that's important.

The second thing we've been very concerned about is that we don't go back to the pattern of 14 years ago when the GSEs offered sweetheart terms to people just because they have a lot of volume. The Crapo bill not only accounts for parity pricing on the fees that the government is going to charge for their guarantee, but also seems to require the guarantors to do that. We think that’s a very positive thing and commend the chairman for including that in there.

What are your concerns with the proposal and why do they outweigh the positives, in your opinion?  

There's two major concerns we have in the bill that we think are unnecessary and will create a lot of problems for small lenders. On that basis, I think we have a lot of support from the broader small lending community. We have a coalition called the GSE MainStream Coalition, which is basically most or all of the small lender groups, plus the consumer and housing groups.

We find we have a lot in common. For example, two years ago, Senate Banking Committee had a hearing with six small lender groups, and basically all of them opposed this concept of multiple new guarantors. Basically, right now, Fannie and Freddie have what people would call a duopoly. They set underwriting standards, they purchase loans, and they facilitate the securitization of those either through their providing a guarantee or them providing a cash window to smaller lenders. The central point is whether Congress should authorize additional people to compete with them.

There's a number of arguments against [authorizing additional guarantors], both sort of in the general good and from the perspective of small lenders. More guarantors is sort of loosely defended on the basis of “more competition.” The problem is, if you go back and look at what really happened 12 years ago, it was competition that caused the problems. Fannie and Freddie, in an effort to compete with the subprime market, dropped their underwriting standards [and] basically because they [wanted to] maintain market share. They drove down standards to a ruinous level, so the idea of creating more competition on that basis sort of reopens that Pandora's Box. That’s why so many groups, including ours, would argue instead for a utility model where they would act more as a securitization conduit and the competition would take place at the risk-sharing level and at the lender level.

Generally, we think it's a problem, but more specifically, we have big concerns about what's called “vertical integration.” The big Wall Street integrated banks  — who have significant securitization capabilities and also are a major player in mortgage lending  — could leverage the securitization of part of the transaction in the secondary market to gain an advantage. They could either deal exclusively with their bank affiliate or deal preferentially with the large players. That's a huge concern for us. It would diminish our members' ability to securitize loans. We think it would undermine the cash window, and therefore, small lenders would be hurt. We don't really see this as a close call.

You have also expressed concerns about turning over the GSE market to Ginnie Mae. Why the concern?

The House Financial Services Committee had a hearing in December on what was called the Ginnie Mae model, where the ultimate guarantee would be a Ginnie Mae guarantee. We laid a lot of these concerns then — it's about small lender access. There are roughly around 350 Ginnie Mae issuers. There's somewhere around 1,300 Fannie or Freddie seller-servicers. There are basically many times more approved seller-servicers under the GSEs than under Ginnie Mae. We think that could be a diminution in the number of players in that market, and that would hurt small lenders.

The second thing is what we've seen over the last six months to a year. We understand that Ginnie Mae wants to take steps to protect their guarantee, so they've sort of heightened scrutiny. We're concerned that they're moving in a direction that could result in over-tightening, particularly for smaller issuers in the Ginnie Mae program which we don't see to be the risky ones. Even Ginnie Mae admits they're not the risky ones. In that environment, to turn the GSE market over to them is a big source of concern for smaller lenders.

Finally, I guess the answer is, why is it necessary? This goes back to an issue we haven't talked about — and a lot of small lender groups have this issue — which is transition risks. Certainly, Ginnie Mae now doesn't have the capability of supervising that market. They could develop that, arguably, but there are a lot of potential concerns about the transition. There have been a fair amount of consensus that just the general federal MBS [mortgage-backed securities] works fine. Why do this?

Don't get me wrong, Ginnie Mae is a good program. Our members use it. It's been effective, but it's a second question whether you want to turn basically the entire government mortgage market over to Ginnie Mae.

If this latest proposal isn’t the answer, what is? What does CHLA see as the most viable reform solution?

That's a good question, and I don't think our answer differs that much from a lot of other players’ approach. We laid it out in our December testimony. Look, Congress clearly has to be involved significantly in this process. But you know, they have been —they've been holding hearings, they worked on legislation. They played an important role in developing concepts that we've incorporated over time, like risk sharing, portfolio reduction and so on. Except for some of the coordination cleanup provisions, you don't need Congress to develop a new policy. You just have to have their concurrence.

Now, all the major reforms that were needed are in place except for recapitalizing the GSEs. And we're concerned that we continue to wait and wait for congressional reform while the GSE sit there with no capital. That doesn't make sense. We think that FHFA should complete their capital rule. FHFA should have the GSEs develop capital recapitalization plans as is authorized under the 2008 HERA law [the Housing and Economic Recovery Act of 2008]. And then, [FHFA should] fashion a plan that Congress doesn't have to directly approve — but you know, is not going to disapprove — that would start to take them to recapitalize and move towards taking them out of a conservatorship, creating them as a kind of a utility model. Then, Congress can do all the things that need to be done, like creating a federal guarantee fund, and codifying things like parity pricing, dealing with the QM patch and adopting a federal backstop.

It’s a cooperative effort, but we’re just concerned that if we wait indefinitely for Congress to come up with a sweeping new reform, nothing is ever going to happen. Instead, we think we should move forward administratively while Congress needs to figure out what their role is. I don’t want us to be having this conversation 10 years from now.

If that’s the way forward, what protections that small lenders specifically need under a utility model once the GSEs are on their way out of conservatorship?

Our basic core principle is, number one, that we want to make sure that there's a strong cash window that serves all willing lenders at competitive prices. And number two, that there's a democratized rich securitization market. That's good for consumers and that's good for keeping the cash window pricing competitive. This will important for small lenders, but I don't think it's an accident that the members of this GSE MainStream coalition have so much in common with the consumer and housing groups. We believe that our policies are pro-consumer because they envision having a rich competitive market, which is really important for consumers in getting good deals and for consumers being able to use community lenders with local servicing.

With so many reform plans seemingly coming from every direction, how close do you think we are to finding a universal solution that most parties, if not everybody, can be happy with?

That's a tough question. I think that we could be very close. I think there is so much consensus on so many issues, but honestly, as long as the concept of adding a bunch of new guarantors is on the table and as long as the sort of this re-transformation in the market and turning over to Ginnie Mae is on the table, I don't see how we can square the circle. I think people have to be flexible, but I understand why everyone tries to hold their ground and insist on things that are important. I think people have to be flexible. Everyone wants to move ahead and say, “Let's get this done.” But I fear that we're still lacking a breakthrough, and so this could go on for some time.


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