Congress Risks Letting Big Banks Control Housing Finance
By Scott Olson
May 26, 2016
It is quite clear that comprehensive legislative reform of the government-sponsored enterprises is not going to happen this year. But Congress is still considering adopting piecemeal housing finance provisions in advance of a broader longer-term proposal. Unfortunately, those piecemeal provisions risk setting GSE reform on the wrong path.
Without comprehensive steps mandated by Congress, the Federal Housing Finance Agency and the GSEs have made constructive progress to reform the way they do business that has increased efficiency in the mortgage system and provided taxpayers with more protection. Since 2013, they have been working together to create a Common Securitization Platform and a related single security for GSE mortgage-backed securities in order to improve pricing and consistency. And the GSEs have aggressively implemented risk-sharing – credit transfers to the private sector – to protect the GSEs and therefore the taxpayers from losses.
Unfortunately, piecemeal congressional proposals are pending which would dictate how the FHFA and GSEs’ recent actions are carried out, and would potentially limit the progress of these reforms. We oppose these provisions because they appear to benefit the big banks, and in the process would hurt small and midsize lenders and the consumers we serve. Congress shouldn’t take incremental steps to prejudge or tilt GSE reform in a certain direction – the wrong direction – before lawmakers and the industry have had a chance to debate a comprehensive housing finance package.
The first proposal is a requirement to take the Common Securitization Platform away from the GSEs and turn it over to the private sector. The problem with this idea is, practically speaking, the common platform would then be controlled by the “too big to fail” banks and securities firms that are the only private-sector entities with the infrastructure to control it. There are several reasons why this would be a mistake.
First, the effect might be to prejudge or tilt the outcome of GSE reform in the direction of eliminating or significantly diminishing the role of the GSEs. Second, the large private-sector securitizers already have MBS securitization capabilities. Why should we potentially give them control over the CSP – a platform developed at a cost to date of $146 million in essentially taxpayer dollars?
But our main concern is that turning the CSP over to the control of the big banks might jeopardize the ability of small and midsize lenders to competitively securitize GSE loans – thus reducing competition and hurting consumers. If this proposal were enacted, there are no protections to ensure that the CSP or other securitization options will continue to exist for these lenders to securitize GSE loans competitively with the big banks. If the TBTF banks did gain that control, there certainly has not been any public debate to date about whether that’s a good idea.
The second legislative provision we are concerned about is a directive to FHFA and the GSEs to do upfront risk-sharing. FHFA has already been testing out upfront risk-sharing, so this seems unnecessary. And FHFA has announced it is going to solicit public comments on how to best carry out risk-sharing. That is the appropriate forum to resolve these issues – not congressional directives that might tilt GSE reform on a course to a predetermined outcome or favor certain market entities over others.
How could more upfront risk-sharing tilt the conversation? Upfront loan-based risk sharing by private mortgage insurers, competitively available to all loan originators, would be prudent. However, an unacceptable result would be a market dominated by upfront risk-sharing through a complicated securitization structure, with investors taking the first loss on the MBS.
Upfront risk-sharing tied to MBS structures – like the multibillion-dollar deals done by JPMorgan Chase – poses a significant danger to small and midsize lenders, consumers and taxpayers. It would lead to more market share for holding companies that have both a bank to do the origination and a securities firm to do the securitization, whereas smaller lenders must seek outside help to package loans into MBS. The result could be Wall Street’s domination of the GSE mortgage markets. This is the so-called vertical integration concern that dominated discussion during debate in the last Congress on a Senate GSE reform bill.
Ultimately, Congress must pass comprehensive GSE reform that provides clarity on many major issues. It’s not just about maintaining a government guarantee but also how to ensure that small and midsize lenders have fair and competitive access to a cash window, how to address concerns about vertical integration, and what provisions are needed so that market participants serve all segments of housing finance.
Congress should not prejudge the final outcome through piecemeal provisions driven by certain market players trying to gain a competitive advantage. The future of our housing markets is too important.
Scott Olson is executive director of the Community Home Lenders Association
Bringing Lenders Together