2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
Essential GSE Reform Small Lender Protections
Community Home Lenders Association (CHLA)
January 24, 2018
Preserve Fannie Mae and Freddie Mac – for Fully Competitive Cash Window
- Fannie and Freddie must be preserved and recapitalized, pursuant to a Utility Model – with the capability to serve the entire small lender market on fully competitive terms.
- A utility model ensures their primary role of facilitating loan securitization for lenders.
- Substantive back-end risk sharing, combined with GSE capital, limits taxpayer risk.
- Regulation is needed to avoid a 2008 type credit race to the bottom for market share and ensure they serve low/moderate-income borrowers, and rural and underserved markets.
No Front-end Risk Sharing- to Preserve Competitive Securitization Execution
- Back-end risk sharing is more competitive, creating a broad investment after-market.
- Front-end risk sharing creates a choke point for small lenders – disadvantaging them vs. larger lenders, by requiring credit enhancement to be in place prior to loan sale to GSE.
- Front-end risk sharing also creates opportunities for volume discounts and for vertically integrated Wall Street banks and other large aggregators to dominate origination market.
- Thus, risk sharing should be limited to back-end transactions (e.g. STACRs).
- If front-end risk sharing is allowed it must: (1) be limited to PMIs or other firms without loan origination capabilities, (2) include a complete ban on volume discounts or proxies for that, (3) serve all qualified seller-servicers equally, & (4) use fully transparent pricing.
No New GSE Charters – to Avoid Vertical Integration and Serve LMI Market
- GSE reform legislation should not charter any new entities to compete with Fannie and Freddie, particularly any entities with any role in the primary loan origination market.
- Authorizing new charters to compete with Fannie and Freddie would increase taxpayer risk significantly – creating new Too-Big-To-Fail entities that could dominate mortgages.
- Interfacing with multiple charters would be harder for smaller lenders than large lenders.
- If new charters are permitted, banks, investment firms, and entities with loan origination abilities must not have any ownership interest or influence – to avoid vertical integration.
- If new charters are permitted, they must serve all qualified seller-services and must serve the entire market of low and moderate income borrowers, rural and underserved markets.
Ban Volume Discounts; Small Lender Parity on Variances and Other Policies
- Volume discounts, pricing preferences, or any proxies should be prohibited – not just for federal G Fees – but also for fees charged by any new GSE charters or with risk sharing.
- Small lender parity should also extend to: (1) buy-up or buy-down grids, (2) loan level price adjustments, (3) variances, (4) loan repurchase policies, and (5) underwriting terms.
- Small lender parity and protections should statutorily be written into the GSEs’ charter.