Congress mulls rules to open secondary markets to smaller lenders

Critics worry solution won't be structured to ensure equitable access

As the mortgage market begins to stabilize, many small lenders are diversifying their secondary mortgage market options, prompting Congress to propose equal opportunities for smaller institutions to enter the industry.

As regulators consider both transitional and end state housing reforms, all panelists during a Senate Banking Committee hearing on Tuesday argued that the future market needs to provide direct access for small lenders who can take on requisite responsibilities.

In response to market participants, Congress proposes an expanded system that resembles the Ginnie Mae model in which lenders are issuers — leaving them responsible for obtaining private credit enhancement before delivering pools to the securitization platform for the government guaranty.

Additionally, the proposed bill expands the role for Federal Home Loan Banks.

While all panelists applauded both sides of the aisle for creating a mutual organization, some minor hiccups remain the way of a smooth transition to a new normalcy of mortgage finance.

“This approach may work for some lenders, but may be too operationally difficult for many small lenders,” explained Mortgage Bankers Association chairman Bill Cosgrove.

The are various concerns around the economic model of the proposed mutual, specifically that the mutual organization will likely be a private, not government organization. And as such, the cost of financing may be prohibitively high.

Additionally, lenders working with the mutual would likely be required to maintain an equity stake in the cooperative, representing an ongoing liability that would be difficult to liquidate if the lenders needed funds.

Furthermore, there are questions regarding criteria for the mutual, including if the organization is optimal, it should be open to all lenders to maintain a level playing field.

"While a mutual organization hold promise, it must be economically viable with governance that assures equitable access for all lenders," stated American bankers Association chairman, president and CEO Jeff Plagge.

Consequently, ABA recommended that the Committee consider the creation of a mutual entity, which would not be limited to only small lenders.

Put simply, an expanding of participants would allow potential capital to grow to a large enough degree that capitalization costs are more easily achieved.

“If a mutual were to be created as an access point to the federal guarantee, it must be structured to ensure equitable access for all members, regardless of size or charter type. This would involve statutory mandates as to the mission, purpose, and activities of the mutual,” Plagge said.

While credit unions hedge against interest rate risk in various ways, selling products for securitization on the secondary market remains a key component of safety and soundness.

As a result, it is critical lenders have a continued and unfettered access to market sources, including the enterprises, Ginnie Mae and the Federal Home Loan Banks, said National Association of Federal Credit Unions associate vice president of risk management Apple Federal Credit Union in Fairfax, Va. John Harwell.

Thus, NAFCU has concerns about the impact the mutual organization could have on the availability of loans in high-cost areas.

Additionally, there were concerns from most panelists about the $15 billion cap for participation in the mutual that exists because entities below this threshold will be unable to generate enough volume to ensure liquidity.

Overall, all policymakers and experts agreed that small lenders play a vital role in the secondary market. As a result, the key idea to remember in transitioning reform is “to it right more so than doing it fast.”  

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