The battle lines surrounding the potential reform of Fannie Mae and Freddie Mac are becoming firmly drawn, with the Community Mortgage Lenders of America denouncing and rejecting a recent letter from several of the largest trade groups in housing that called for the Federal Housing Finance Agency to leave Fannie and Freddie reform to Congress, rather than allowing the government-sponsored enterprises to rebuild capital.

The strong response from the CMLA comes days after the Mortgage Bankers Association, National Association of Realtors, American Bankers Association, National Association of Home Builders, and the National Housing Conference sent a letter to FHFA Director Mel Watt imploring him to not make any further amendments to the GSE conservatorship agreements, including ones that would enable the GSEs to rebuild their dwindling capital base.

In the letter, the trade groups state that they believe that the current state of the housing finance system, with Fannie and Freddie in conservatorship, has “provided stability,” but argue that more needs to be done by legislators to fully fix the system.

“Policymakers and stakeholders need to continue to work together on the important efforts to advance housing finance reform through a legislative solution,” the groups’ letter states.

“Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners,” the groups said. “Policymakers need to continue to focus on the paramount objective of fixing the structural flaws that led to the breakdown of the housing finance system -- the only outcome that will protect taxpayers, preserve access to credit, and ensure a stable housing finance system.”

In a release published this week in response to the letter, the CMLA called the motivation of the trade groups into question and said that the trade groups are pushing for Watt and the FHFA to “ignore” the GSEs dwindling capital, which is scheduled to be drawn down to $0 in 2018.

“It is not counterproductive to avoid the very possible need for another Federal bailout of the GSEs,” CMLA Executive Director Glen Corso said.

“The very lesson of the 2008 financial crisis is that a strong GSE capital base is key to survival in times of financial stress,” Corso said.

“The only parties that would profit from a state of severe financial instability for the GSEs are the large banks and Wall Street investment houses whose objective is to control the mortgage market from top to bottom – from retail lending to access to the capital markets,” Corso said. “Why the major housing trade associations would be advancing the goals of Wall Street and the too-big-to-fail banks is baffling.”

The CHLA, as well as other organizations that represent smaller lenders, including the Community Mortgage Lenders of America and the Independent Community Bankers of America, are on record with their opposition to the GSEs current capital structure.

In February, the Community Home Lenders Association, the Community Mortgage Lenders of America, and the Independent Community Bankers of America wrote to Watt, requesting that he use his powers as the FHFA director to suspend the dividend payments from Fannie and Freddie to the Department of Treasury, which are currently required by the Preferred Stock Purchase Agreements that went into effect when the government took Fannie and Freddie into conservatorship.

The letter from the MBA, NAR, ABA, NAHB, and NHC did not address allowing the GSEs to rebuild capital in explicit terms, but the subtext wasn’t lost on the CMLA.

“CMLA was formed to advocate for the interests of small and mid-sized lending members from efforts to shut them out of the secondary market by giving large banks an unfair competitive advantage,” Corso concluded. “That MBA and other large housing associations felt the need to respond to our position, shared by a growing coalition, is evidence that Washington policy makers are reconsidering and we intend to re-double our efforts on this urgent issue.”