Community Home Lenders Association
Written Statement Submitted Senate Banking Committee Hearing [7/23/2013] –
“Creating a Housing Finance System Built to Last:
Ensuring Access for Community Institutions?
The Community Home Lenders Association is pleased to submit this written statement to the Senate Banking Committee on this hearing which focuses on the importance of ensuring that consumers have access, through smaller community lenders, to affordable mortgage loans under a reformed housing finance system.
The Community Home Lenders Association (CHLA) is a national non-profit association of small and mid-sized community based non-bank mortgage lenders. The mission of the CHLA is to advocate for federal mortgage programs, rules and regulations which treat community mortgage lenders fairly, and which reflect the critical importance that these lenders play in providing access to mortgage credit for borrowers, in increasing competition in mortgage markets, and in giving borrowers the option of obtaining mortgage loans and services at the personalized, local level which community mortgage lenders provide.
One of the strengths of our mortgage finance system has been the role that securitization has played in providing long term fixed rate mortgages for single and multifamily housing. Securitization allows mortgage lenders located anywhere in the country to originate loans and sell them off, thus replenishing the originator’s reserves and capacity to originate new loans. This has created a vibrant market in which smaller banks, credit unions, and non-bank mortgage lenders can actively participate in mortgage markets, provided they are responsible and originate according to loan underwriting standards that the ultimate purchasers or guarantors establish.
For many decades, this process worked well, creating a TBA market for 30 year fixed rate loans and fueling a vibrant housing market which has increased homeownership rates and helped the housing sector play a vital role in the economy. Obviously, though, this process did not always work so well, such as during the subprime housing boom, with the result being the federal government putting Fannie Mae and Freddie Mac into receivership, advancing hundreds of billions of tax dollars to cover GSE loan losses, and providing TARP funds to major financial institutions that were over-exposed to mortgages.
Now, Congress is at a crossroads, facing momentous decisions on how to deal with Fannie and Freddie, and how to restructure our nation’s mortgage finance system, to achieve the twin goals of continuing to provide available, affordable long term fixed rate mortgage loans to meet our nation’s housing needs, while at the same time responsibly protecting taxpayers.
In this respect, the CHLA commends the Subcommittee for holding this hearing, and the Committee for beginning a debate on these critical issues. The CHLA also commends the work of a bipartisan group of Senators in introducing S. 1217, a comprehensive bill to reform our mortgage finance system. The CHLA believes S. 1217 is an excellent start, with many good provisions. Still, much more work lies ahead in debating these issues, finding ways to strengthen the bill’s provisions, and ultimately implementing a workable solution.
The CHLA is taking this opportunity to submit a written statement to focus on the critical importance of getting mortgage reform right in terms of creating a diverse mortgage market that continues to include community based lenders, and smaller banks and credit unions. This is essential to having a truly competitive mortgage market, in which consumers have real choices. We also need to get this right, because if we don’t, we may end up with a mortgage market dominated by a few large banks and financial institutions that are “too big to fail,” and, because of their central role in housing finance, effectively “too important to fail.”
On the central debate about whether there should be a continued federal guarantee of MBS, the CHLA takes the position that such a guarantee is warranted, and that S. 1217 forms a good starting point for achieving that goal. A federal guarantee would provide essential liquidity to ensure affordable fixed rate long term mortgages for our nation’s housing needs, while also ensuring countercyclical lending when the private sector exits the market due to adverse economic conditions. A federal guarantee is also important to ensuring that mortgage credit is available in all regions and for all property types. The CHLA believes this can be done in a way that protects taxpayers, through risk sharing to create market discipline and private absorption of first losses, guarantee fees that reflect the true risk to the government, and sound regulation.
But regardless of the the details of how mortgage reform is done, the CHLA would like to identify the key issues and principles that we believe must be debated and addressed, in order to ensure a broad, consumer-oriented mortgage market.
Making Sure There is a Cash Window for Smaller Loan Originators
The CHLA appreciates that a great deal of effort went into S. 1217 to address concerns about smaller lenders having access to mortgage markets if the originator can’t securitize the loans themselves. This includes language about the importance of access to a “cash window,” and authorization of both a cooperative and the FHLBs to serve this function.
However, the CHLA believes it is critical, both in the drafting of the legislation and its implementation, that such access is actually achieved. The CHLA would like to make two important points. First, the FHLB provision may be very helpful to banks and credit unions, but does not help non-bank community mortgage lenders. In fact, the existence of the FHLB option, if it works, could put less pressure on making sure the cooperative works, which would mean that only non-bank community lenders are left out. Secondly, whether through revised language or through a very strong commitment in practice to make this work, the CHLA believes it is critical to ensure that the cooperative – or whatever mechanism is designed to provide a cash window – ACTUALLY works in practice. Because, if not, we could lose a very vital portion of our housing finance system.
Fair and Equitable Pricing
One of CHLA’s concerns comes from the experience with the GSEs, in which volume discounts and other features were at times used to create a pricing structure which unfairly discriminated against smaller loan originators. Consumers are best served – and fairness dictates - that regardless of how mortgage reform is done, all players in a position of power within the market should have a pricing structure that is fair and equitable, that provides for access to secondary markets on full and equal terms to all qualified loan originators, of all types and sizes.
The CHLA notes that S. 1217 requires that the new regulator shall carry out the bill in a manner that credit unions and community and mid-sized banks shall have equal access to any common securitization platform and are not discriminated against through discounts for volume pricing or other mechanisms. This is a good start, but the CHLA has two recommendations to strengthen this. First, the CHLA believes it is important to modify the bill where it refers in places like this to smaller banks and credit unions to also refer to community based non-bank mortgage lenders, as these lenders play an important part in our mortgage markets and should have comparable treatment. Secondly, the CHLA believes that prohibitions against volume discounts or other mechanisms that discriminate against smaller lenders should apply not just to a federal insurance guarantee on the MBS, but also to other key players in the process, including guarantors and issuers.
In addition to concerns about price discrimination, it is also important that net worth and capital requirements not be utilized in a manner that unreasonably discourages qualified loan originators and servicers. It is fair and reasonable for loan originators to have sufficient capital to be a going concern, to meet buyback/indemnification responsibilities and for servicers to meet advance obligations. But net worth requirements should always be transparent and nondiscriminatory among lenders, and should be reasonably related to indemnification and advance exposure.
Without such equitable treatment, small and mid-size mortgage lenders would not be able to compete on equal terms, and the result could be a market dominated by only the biggest lenders.
Avoid Conflicts between Securitizers and Origination Affiliates
Another major concern is the fact that many of the nation’s largest securitizers also have extensive loan origination distribution networks. Regardless of how mortgage reform is done, it is likely that the largest banks and securities firms will control the process of securitizing mortgages. If these same securitizers channel this power into exclusively purchasing loans from their affiliated mortgage originators, in short order small community based lenders, banks, and credit unions could quickly be cut out of the mortgage origination business.
These types of concerns could be exacerbated if, as is likely, risk sharing is required. Currently even moderately sized mortgage originators are able to securitize Fannie Mae and Freddie Mac loans, as there is a relatively simple federal guarantee. However, if securitizations in a reformed world generally require risk sharing through the securitization structure itself – eg., through subordinated tranches – then many moderately sized lenders may no longer have the expertise and capability of doing these more complicated securities structures. They may then be cut out of the securitization market.
There are many potential ways to address these concerns. One blunt instrument might be to limit market share of any one lender. Alternatively, there may be ways to do this by constraining the ability of securitizers to exclusively channel loans to lender affiliates, or to ensure, in practice, that there is a competitive guarantee option that is not tied to securitizers, such as private mortgage insurance. However, regardless of the solution, Congress should acknowledge the challenge, and take steps to anticipate and address concerns about these factors that could lead to a highly concentrated mortgage market.
Risk Sharing Must Be Done Right
As noted, there seems to be an increasing likelihood that, regardless of the way mortgage reform unfolds, risk sharing will play an important role. The CHLA applauds the Federal Housing Finance Agency (FHFA) for its pilot program to investigate various risk sharing models. Before Congress and the nation commit to any mortgage structure that relies heavily on risk sharing, there needs to be some degree of assurance that this can work, and work on a scale needed to meet our nation’s mortgage needs. We should not gamble with housing, which plays such a critical component in our nation’s economy.
Moreover, risk sharing should be done right. First, any guarantee should be incontestable; a guarantee should be a guarantee, not an opportunity to negotiate with the lender to see whether they might first foot the bill for losses, even though the lender did everything right in underwriting the loan. Correspondingly, the lender should bear its traditional historical responsibilities – underwriting loans according to loan standards, taking buyback risk related to reps and warranties, and assuming servicing responsibility for advances.
Finally, if risk sharing is to become an important component of lending, Congress and the regulators should strive to create a broad and competitive market for different guarantee sources, so that the market does not become concentrated as a result of a narrow range of options.
Single Securitization Platform
The CHLA applauds both the provisions of S. 1217, and the efforts of the FHFA to create a single securitization platform. The CHLA believes these are important steps to create the most competitive possible market for consumers, by creating opportunities for all lenders, including community based non-bank mortgage lenders, community banks, and credit unions.
In closing, the CHLA is pleased to participate in this important debate about the future of America’s housing finance system, and to offer these views and recommendations.