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CHLA unveils plan for massive GSE reform, ending profit sweep

Concern rises about pending congressional proposals

Congress

The Community Home Lenders Association authored an action plan that lays out transitional steps to reform Fannie Mae and Freddie Mac, preserve a government guarantee and protect taxpayers.

“Consumers’ access to credit is best served by a competitive mortgage market, with full participation by nonbanks and small banks,” said Scott Olson, CHLA’s Executive Director. “CHLA agrees that Fannie and Freddie should be reformed to protect taxpayers — but they should also maintain their key role as a cash window and should be in control of obtaining risk sharing to avoid the big banks controlling the market.”

The plan was released in response to concerns that some aspects of pending Congressional GSE proposals could promote market concentration and a return of Big Bank practices that contributed to the 2008 housing crisis.

“The Community Home Lenders Association supports Congressional efforts to expand risk sharing pilots, develop a Common Securitization Platform, and stop g-fees from being used as a Congressional spending offset,“ he said. “But CHLA wants to make sure that any Preferred Stock Agreement limits do not undermine the GSEs’ role in providing a small lender cash window, and that up-front risk sharing is not used in a way that leads to a mortgage market dominated by the big banks.”

CHLA recommends:

  • The GSE profit sweep should end. Treasury should put profits into a Capitalization Reserve Account, to both provide a short-term loss reserve and a long-term capital source to ensure the GSEs’ continued critical role as a reliable cash window for smaller lenders.
     
  • Congress should direct the FHFA to develop a plan to show how the GSEs could be recapitalized, and whether it recommends doing so.
     
  • The GSEs should control “up-front” risk-sharing pilots, with protections against market concentration, including bans on volume discounts and bans on securities firms doing risk-sharing MBS from dealing preferentially with bank affiliates.
     
  • FHFA should complete work on a common securitization platform and single security – but should not turn over the CSP (developed at taxpayer expense) to Too-Big-To-Fail bank/securities firms.
     
  • The Federal Home Loan Banks should not use an explicit or implied taxpayer guarantee for MBS unless all mortgage lenders, including nonbanks, can participate on a non-discriminatory basis.

In recent years, nonbank lenders have significantly increased mortgage market share, as many banks have either exited the market or cut back on loans to lower income borrowers. CHLA’s GSE Action Plan reflects concerns that proposals to turn the Common Securitization Plan over to private firms or let banks use “up-front” risk sharing in an anti-competitive manner risks a return to the same big bank practices that led to the 2008 housing crisis.

A new component included in CHLA’s Action Plan is its recommendation that Congress direct the Federal Housing Finance Agency to present a GSE recapitalization plan to Congress no later than Sept. 6, 2016, the eight-year anniversary of the conservatorship of Fannie Mae and Freddie Mac. 

CHLA says it believes that with Congress gridlocked on housing finance reform, FHFA should act where there is consensus on transitional steps — and it should develop more detailed recommendations on long-term reform, to help Congress in areas where there is not consensus.  Other CHLA proposals — setting aside GSE profits, banning anti-competitive practices like volume discounts, and completing the Common Securitization Platform — reflect recommendations CHLA has previously made.

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