Scott Olson, Executive Director of the Community Home Lenders Association (CHLA), sent a note addressing up-front risk sharing discussing the message sent by the CHLA to the FHFA (which oversees Fannie & Freddie.) “This big concern is the longstanding Congressional concern about ‘vertical integration’ – that the large Wall Street banks could use their securities power and expertise to leverage the domination of the GSE mortgage origination market – thus hurting consumers and small and even mid-sized lenders. The letter explains in detail why these are serious concerns. Regarding specifically up-front PMI risk sharing – CHLA is opposing – unless there are formal protections for community lenders – such as a prohibition on volume discounts.
“The CHLA has submitted detailed recommendations and comments to the Federal Housing Finance Agency (FHFA) in response to FHFA’s June Request for Input (RFI) on Credit Risk Transfers by Fannie Mae and Freddie Mac. CHLA submitted these comments as the only national association that exclusively represents non-bank mortgage bankers.
“The CHLA comment letter extensively lays out the problems with up-front risk sharing – including the lack of transparency, long-time Congressional concerns about vertical integration, and the harm up-front risk sharing poses to consumers and small lenders. The letter also notes that up-front risk sharing would undermine a “level playing field,” an objective stated in FHFA’s RFI. And it points out that the GSEs could accomplish risk sharing goals of reducing taxpayer risk exclusively through back-end risk sharing without harming consumers and small lenders.
“The CHLA laid out 3 main recommendations in the letter. First, CHLA’s main recommendation is that FHFA should not permit any Up-Front Credit Risk Transfers by the Enterprises. CHLA believes this is needed to ensure competitive access for all mortgage originators in order to maximize consumer choices and competition and lower mortgage rates and fees.
“Second: if, however, the Enterprises are permitted to engage in up-front Credit Risk Transfers, this should be limited to loan level risk sharing through guarantors [e.g., private mortgage insurers (PMIs)] – which MUST include three market protections: (a) a prohibition against volume discounts, (b) a requirement that any guarantor/PMI must serve all approved seller-servicers, and (c) full pricing transparency.
“Third, additionally, if the Enterprises are permitted to engage in any up-front Credit Risk Transfers, such use should be conditioned on periodic certifications by FHFA, based on objective evidence, both that: (a) a fully competitive cash window exists to serve all origination market needs, and (b) mortgage originators can securitize loans on a fully competitive basis with vertically integrated mega-banks and other aggregators that structure and execute up-front risk sharing securitizations. And there should be complete transparency by the Enterprises with respect to G Fees, buy-up and buy-down grids, LLPAs, or any other mechanism that provides for pricing variability.”
“The letter goes on to state that, ‘These recommendations reflect bipartisan concerns raised during debate on the 2014 Senate GSE Reform bill that vertical integration poses the significant risk that the major Wall Street banks could use securities affiliates to monopolize or dominate Enterprise loan origination – which in turn led to provisions effectively barring such practices that use securitization-based Credit Risk Transfers.’
“The letter also questions whether so-called ‘collateralized recourse’ transactions were truly recourse, pointing out that many of the up-front risk sharing transactions done to date appear to involve third party risk sharing – as opposed to risk retained by the actual mortgage originator. This raises concerns about vertical integration and about the ability to maintain a competitive GSE mortgage origination market.” Thank you Scott.