Love and hate on the Johnson-Crapo GSE reform effort

Community bankers need more convincing

Industry leaders gave a generally loving welcome to the agreement on GSE reform reached by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, today, with smaller lenders and one investor and taxpayer-minded politician making up a significant dissent faction.

The Senators are planning to introduce the legislation soon.

The long-anticipated agreement is the latest attempt to craft a bill that overhauls Fannie Mae and Freddie Mac's role in mortgage finance while opening up space for the private sector. The agreement builds on the earlier Corker-Warner bill as senators try to find middle ground. Of course any bill passed by the Senate will still have to get through the House of Representatives.

The Bipartisan Policy Center Housing Commission issued a statement that applauded the senators, and said that the agreement reflected many of the items on the BPC's own report last year, including "the gradual wind down of Fannie Mae and Freddie Mac; a greater role for private capital in assuming mortgage credit risk; a continued, but more limited, role for the federal government as the insurance backstop of last resort in the secondary market for mortgage-backed securities; and a commitment to ensuring access to safe and affordable mortgages for all borrowers in all geographic markets."

David Stevens, president and CEO of the Mortgage Bankers Association, said, "This announcement reinforces the immediate need to address GSE reform in a substantive, transparent way." Stevens commended the senators for their bipartisan work and pledge to work together with the Committee.

The Securities Industry and Financial Markets Association hailed the agreement as "a positive development" and commended the senators' work on the project. "Clarification of U.S. housing policy is critical to maximizing the ability of private capital to fund mortgage credit creation. SIFMA and our members will remain constructive partners in the effort to reform and revitalize our secondary mortgage market…" the association said in a statement.

However, not everyone is happy with the agreement.

Smaller lenders, especially community banks, want to make sure they can still be competitive, and that they will not have to share their customer data. After commending the efforts of the senators, a statement by the Independent Community Bankers of America warned that any legislation would have to:

  • allow community banks to sell loans through an independent entity that does not compete with community banks
  • do not appropriate community bank customer data for cross-selling of financial services
  • preserve the Federal Home Lon Banks as a community bank access pint to the national secondary market
  • ensure pricing of any government guaranty is fair and equal for all market participants regardless of volume of loans guaranteed
  • do not result in the consolidation of the housing-finance system to only a select few mega-financial institutions

Investors in the GSEs have expressed concern that the agreement doesn't broach the topic of the third amendment, which changed the 10% cash dividend paid to Treasury to a system where the GSEs pay all of their quarterly profits to Treasury. 

Senator Pat Toomey, R-Pa., addressed these remarks to Treasury Secretary Jack Lew, on behalf of "community banks, retirement funds and other investors":

"While I strongly support GSE reform that protects taxpayers, such efforts should also be mindful of investors in addition to other considerations," Toomey said in the letter. "Taxpayers should be fully compensated, but once they are, investors, such as the York County pension fund in Pennsylvania, should not be denied their fair share of any remaining value."

"What comfort can you give to private sector investors considering investing in the future of the housing finance system when they believe that the government arbitrarily changed the rules of the game mid-stream with the Third Amendment?" he asked.

Toomey also questioned Lew on the Treasury's stake in Fannie and Freddie, and why the GSEs have not be consolidated on the Federal balance sheet.

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