Opinion

[PULSE] Key issues affect smaller mortgage lenders in GSE reform

The most critical issue for smaller IMB's and smaller banks alike is G Fee parity

The Community Home Lenders Association (CHLA) recently used the opportunity to submit a comment letter on proposed GSE capital levels to instead focus mostly on pending unresolved issues that are critically important to small mortgage lenders.

CHLA did this not because capital levels aren’t important; they are. But the pace of Fannie Mae and Freddie Mac’s eventual exit from conservatorship is accelerating, with the development of the capital rule and retention of financial advisors. Therefore, CHLA believes that critical unresolved GSE reform issues merit more public debate. Most critically to our members, CHLA believes these issues should be resolved in favor of broad equitable access for all lenders, which increases competition and benefits consumers.

Scott Olson
Guest Author

The most critical issue for smaller independent mortgage bankers (IMBs) and smaller banks alike is G Fee parity. An important factor in the GSEs’ landing in conservatorship was preferential pricing for the largest – and riskiest – mortgage loan originators, such as Countrywide and WAMU. FHFA
Director Calabria, along with his predecessor Mel Watt, should be commended for being champions of G Fee parity. Unfortunately, as Fannie and Freddie leave conservatorship, market pressures will inevitably build for Fannie and Freddie to revert to volume discounts.

We need to make G fee parity permanent. The simplest way is what the Administration has proposed and CHLA has publicly supported –- requiring a “nationwide cash window and . . . equitable secondary market access to all lenders” — as part of a revised GSE Preferred Stock Purchase Agreement (PSPA). CHLA believes this policy should be broad – applying to all GSE
pricing including MI insurance used with GSE loans, as well as non-discriminatory policies with respect to things like DU/LP waivers and repurchase policies, and an end to pilot programs that benefit only a few lenders.

The second major issue is how the GSEs will be regulated. There seems to be widespread support for the concept of a “Utility Model” – but little agreement about what it means. CHLA supports the current FHFA approach, which does not dictate pricing, but as explained in a March 2020
Committee for Responsible Lending March 2020 paper entitled “Treat Fannie and Freddie as Utilities” – where “FHFA establishes a target bank for the GSEs’ overall implied ROE, in combination with FHFA’s capital standard, and routinely reviews GSE returns to determine whether guarantee fees
charged to lenders are at an appropriate level.”

Post-conservatorship, FHFA should also have clear and explicit authority to limit excessive GSE risk taking, prohibit new products that don’t serve their mission, limit portfolio holdings to retrain interest rate risk, and ensure that the GSEs don’t use their duopoly status to impose excessive fees.

As our comment letter explains, these authorities and objectives could be made more explicit and permanent, even extending into a post conservatorship period, through any one of a number of different
vehicles, including FHFA incorporating them into regulations, adoption in the GSEs’ capital restoration plans, inclusion in any consent decreed that is established for the GSEs, and amending the PSPA.

The third major unresolved issue is whether to grant additional GSE charters, beyond just Fannie and Freddie. In 2017, six national associations representing small lenders including CHLA, testified before the Senate Banking Committee. All six agreed that Congress should not authorize more charters.

Our CHLA comment letter explains the numerous reasons why: (1) More GSE charters is contradictory to a true Utility Model; (2) more GSE charters is bad for small lenders because they create the risk of vertical integration; (3) more GSE charters is bad for consumers because they create incentives for new guarantors to cherry pick borrowers, while ignoring underserved borrowers, underserved markets, and underserved areas; and (4) more GSE charters would increase taxpayer risk, particularly with mega Wall Street banks that have FDIC insurance.

A February 2019 National Association of Realtors paper concluded that “. . . history shows that competition among guarantors is the problem—not the solution.”

CHLA agrees. We believe that competition is good – but it should take place at the loan origination and back-end risk sharing levels –
not at the securitization level where large Wall Street banks could use their secondary market status to gain an unfair advantage in the primary mortgage loan origination market.

The CHLA paper goes on to discuss other areas which are also important, but less consequential for smaller lenders. These include balanced risk sharing policies (but NO front-end risk sharing, which also creates risk of vertical integration), an explicit federal government guarantee of MBS as well as retaining some form of a federal line of credit, and transparency and some limits on political advocacy of the GSEs.

Twelve years is an extraordinary amount of time for the GSEs to be in conservatorship. Yet, developments are accelerating. Without a more intense public focus, important long-term policies related to their exit from conservatorship could be solidified, either directly or by default.

Everyone in the mortgage industry, including smaller lenders, is understandably focused on COVID-19, mortgage forbearance and defaults, and the uneven economy. But if you care about the role of small lenders in GSE reform, now is the time to pay attention.

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