Small lenders to Congress: Here’s the GSE reform we don’t want to see

Testify before Senate Banking Committee

Small lenders urged Congress to ensure a level playing field for all lenders at the Senate Banking Committee’s hearing Thursday entitled Housing Finance Reform: Maintaining Access for Small Lenders.

Homestar Financial Corp. President Wes Hunt testified before the committee on behalf of the Community Mortgage Lenders of America, where he laid out the steps remaining on housing finance reform.

Hunt explained the Federal Housing Finance Agency needs to exercise its authority to set capital standards for the GSEs and oversee and approve the creation and execution of a recapitalization plan.

“Congress should make permanent the mandate of equal fees for all lenders and the FHFA’s authority to regulate the guaranty fees charged by the GSEs as well as extending these two safeguards to upfront risk sharing arrangements as well, in order to ensure a level playing field for America’s homebuyers and all lenders,” Hunt said.

“Congress must also provide a federal backstop for the GSEs, so their MBS will continue to command strong prices in the marketplace, which translate to affordable interest rates for homebuyers and continued availability of 30-year fixed-rate loans,” he said.

Hunt also pointed out several proposed changes small lenders neither want nor need,  including complex legislation or loopholes for larger banks. Here are the points he laid out in his prepared remarks, saying these types of reform would be detrimental to small lenders and their consumers:

  • Massive, complex legislation to create someone’s vision of what the U.S. housing finance system should look like if we were designing it from scratch today;
  • Creating avenues or loopholes that could be exploited by the large banks and their Wall Street enablers to re-establish the un-level, concentrated mortgage market that existed in the pre-crisis era, with dominant positions for the large banks in both the primary mortgage origination and secondary capital markets;

Another witness, William Giambrone, Platinum Home Mortgage president and CEO and Community Home Lenders Association president, also warned against some types of housing finance reform, saying the secondary market could try to monopolize the primary loan origination market.

“The unifying theme behind these concerns is that secondary market players, particularly vertically integrated investment banks or banks, might be able to use their market clout as a secondary market force to monopolize or dominate the primary loan origination market, acting through their bank affiliates that originate mortgage loans,” Giambrone said.

He also laid out four specific lender protections which he said should be included in any GSE reform legislation.

1. Preservation and recapitalization of Fannie Mae and Freddie Mac, using a Utility Model.

2. No new charters should be authorized to carry out functions that Fannie Mae and Freddie Mac carry out.   

3. All risk sharing should be done as back-end risk sharing.

4. Pricing, underwriting and variance parity.

Before the hearing, the Mortgage Bankers Association sent a letter to the Banking Committee, expressing its support for small lenders. It also emphasized that its proposal for secondary mortgage market reform supports the small mortgage lender market.

“We believe [this plan] will lead to a more stable system that protects taxpayers while also promoting broad credit availability in a primary market featuring lenders of all sizes and business models,” MBA CEO David Stevens said. “Our plan features a number of provisions specifically designed to protect small and mid-sized lender access to the secondary market.”

Earlier this year, the MBA published a 60-page white paper which breaks down the transition process for GSE reform.

A second letter was sent by trade groups representing predominantly small and mid-sized lenders involved in financing housing for low- and moderate-income families and first-time homebuyers, and also urged action, saying the presence of small lenders spurs competition in the market and increases choices for borrowers.

Now, in a third letter to the committee, more than 100 small lenders endorsed the MBA’s plan.

“The market served today by the GSEs features a more diverse set of lenders offering more competition and choices for borrowers,” the third letter said. “Independent mortgage bankers, community banks and credit unions have all gained market share, in part due to administrative reforms undertaken by the Federal Housing Finance Agency…However, without legislation to codify and strengthen the reforms put in place by FHFA, these gains remain at the discretion of future FHFA directors. As such, they are susceptible to being rolled back or reversed entirely.”

In addition to Giambrone and Hunt, these were the witnesses who testified at the committee’s hearing:

  • Brenda Hughes, First Federal Savings Bank of Twin Falls senior vice president and director of mortgage and retail lending, on behalf of the American Bankers Association
  • Tim Mislansky, Wright-Patt Credit Union senior vice president and chief lending officer, and myCUmortgage president, on behalf of the Credit Union National Association
  • Jack Hopkins, CorTrust Bank president and CEO, on behalf of the Independent Community Bankers of America
  • Charles Purvis, Coastal Federal Credit Union president and CEO, on behalf of the National Association of Federally-Insured Credit Unions

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