Bankers’ groups urged lawmakers at a Senate Finance Committee hearing last week to reform housing finance to allow continued access for community banks.
The Independent Community Bankers of America (ICBA) advocated for Congress to enact reforms that promote competition and avoid dangerous concentration in the mortgage lending industry, particularly with government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
“ICBA strongly supports reform, but it is essential to borrowers and the broader economy that the details of reform are done right,” Jack Hopkins, president and CEO at CorTrust Bank in Sioux Falls, South Dakota, said on behalf of ICBA. “The worst outcome in GSE reform would be to allow a small number of mega-firms to assume the size and scale of Fannie and Freddie under the pretense of creating a private sector solution strong enough to assure the markets in all economic conditions. Any solution that promotes consolidation is only setting up the financial system for an even bigger collapse than the one we’ve just been through.”
The GSE secondary market should 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, stated Hopkins. Pricing to all lenders should be equal regardless of size or lending volume.
At the hearing, title “Housing Finance Reform: Maintaining Access for Small Lenders,” Hopkins made several recommendations to improve housing finance.
He suggested creating an explicit government guaranty on GSE mortgage-backed securities (MBS) supported by a catastrophic mortgage insurance fund that the Federal Housing Finance Agency (FHFA) can administer. Further, Hopkins recommended changing the GSE corporate charters from the current government-chartered, shareholder-owned, publicly traded companies, to regulated financial utilities that are shareholder owned.
He also offered administrative recommendations for reform, such as requiring the FHFA to review and approve capital plans, establish prudent risk based capital levels as required by the 2008 Housing and Economic Recovery Act (HERA) and set reasonable timeframes and milestones for achieving re-capitalization goals.
The American Bankers Association also testified, discussing the need for GSE reforms.
“These legislative reforms are critical,” Brenda Hughes, senior vice president and director of mortgage and retail lending for First Federal Savings of Twin Falls, Idaho, said on behalf of ABA. “Congress should not defer action any longer. Nine years of conservatorship is more than enough.”
An explicit, fully-priced, fully-paid-for federal guarantee for a targeted portion of the mortgage market will serve as a catalyst for broader market growth and development, she said.
“Absent aggregation and securitization, access to long-term, lower-rate funding would be far more difficult to come by for most primary lenders,” Hughes said. “The government guarantee provided to mortgage-backed securities guaranteed by the GSEs makes them more attractive to the capital markets, ensuring liquidity. As we consider reform, these elements must be preserved and remain available to all primary market participants regardless of size or location.”
She advocated for tailored legislation that takes a surgical approach to altering the current system.