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Community bankers: GSE reform should keep what works and just fix the problems

How to ensure a robust primary and secondary mortgage market

As talks of reforming the government-sponsored enterprises start to resurface under the new Trump administration, the Independent Community Bankers of America penned their version of how GSE reform should take place, taking a different stance from other options floating around.

The ICBA, along with other organizations that represent smaller lenders, have already publically denounced calls for reform in the past from trade associations, such as the Mortgage Bankers Association, which published its plans for GSE reform earlier this month.

The new six-page white paper details the ICBA’s principles and recommendations for reforming Fannie Mae and Freddie Mac to support continued access to the secondary mortgage market for community bank lenders.

Under the current system, Fannie Mae’s and Freddie Mac’s capital reserves will be drawn down to $0 in 2018. Both GSEs sent their latest dividend payment to the Department of the Treasury back in March, following the release of their 2016 fourth-quarter earnings.

But if the ICBA has their way, that money will stay with the GSEs to help rebuild their dwindling capital base.  

The ICBA isn’t alone is this call, banding with fellow community groups and lenders to urge elected officials to suspend the GSEs’ dividend payments to avoid the future need for another GSE bailout. As it stands now, under current conservatorship, the GSEs must reduce capital buffers to $0 next year. This means if they need money, they'll need another bailout.

This new GSE reform white paper gives the ICBA’s general position on reform along with how to move forward with reform.

“Policymakers, industry stakeholders, think tank gurus, and politicians have weighed in on how to resolve this last remaining part of the Great Recession. There have been multiple papers and numerous legislative proposals, including some that have been attached to appropriations legislation, all seeking to end the conservatorship of the GSEs,” the paper stated.  

“Yet, the GSEs remain in conservatorship and subject to the net-worth sweep that is slowly bleeding away what little capital they have. This will eventually bring a day of reckoning for FHFA, the Treasury, and the housing market.”

Instead, ICBA stated that its approach to GSE reform is simple: use what is in place today and is working, and address or change the parts that are not.

The ICBA’s approach has two parts:

  1. Reforms that can be accomplished administratively by Federal Housing Finance Agency within Housing and Economic Recovery Act 
  2. Reforms that will require congressional action.

Here are only a few snippets from the ICBA’s principles for GSE reform. Check out the full white paper here.

1. The GSEs must be allowed to rebuild their capital buffers.

The first step in GSE reform requires the FHFA, the GSEs’ safety and soundness regulator, to follow the mandates prescribed in the 2008 Housing and Economic Recovery Act (HERA), namely, to restore the GSEs to a safe and sound condition. Regardless of which approach or structure reform takes, the existing system must be well capitalized to prevent market disruption or additional taxpayer support in the event of one or both GSEs requiring a draw from the U.S. Treasury during what’s likely to be a lengthy debate and transition period to any new structure or system.

2. Lenders should have competitive, equal, direct access on a single- loan basis.

The GSE secondary market must continue to be impartial and provide competitive, equitable, direct access for all lenders on a single- loan basis that does not require the lender to securitize its own loans. Pricing to all lenders should be equal regardless of size or lending volume.

3. An explicit government guarantee on GSE MBS is needed.

For
 the market to remain deep and liquid, government catastrophic-loss protection must be explicit and paid for through the GSE guaranty fees, at market rates. This guarantee is needed to provide credit assurances to investors, sustaining robust liquidity even during periods of market stress.

“Community banks depend on Fannie Mae and Freddie Mac for direct access to the secondary mortgage market, which promotes lending in local communities and offers an alternative to the largest and riskiest financial institutions,” ICBA President and CEO Camden Fine said.

“ICBA and the nation’s community bankers urge Congress and the Trump administration to end the destructive sweep of the GSEs’ earnings directly to government coffers, put the GSEs on sound financial footing, support equitable access to the housing-finance system, and protect taxpayers from another housing crisis,” Fine continued. 

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