On the topic of risk sharing Scott Olson wrote, “On behalf of CHLA I wanted to respond to your column about GSE up-front risk sharing, since CHLA has a different take than the MBA does on this. CHLA is very concerned about the use of up-front risk sharing and its potential negative impact on independent mortgage bankers. CHLA is particularly concerned if upfront risk sharing is done by large vertically integrated bank/securities firms, as was the case in some large J P Morgan risk sharing deals that have been done This approach creates the opportunity for the big banks to monopolize GSE lending if upfront risk sharing securities deals are the dominant form of risk sharing.
“Up-front risk sharing also raises the risk of a return to significant volume discounts, if the process is done upfront and there are no protections against this. The process described in your article describes how lenders could cut deals with the PMIs – and obviously the big banks with large volume are in the position to cut the best deals. Finally, it is not clear why doing the risk sharing upfront really reduces GSE risk compared to back end risk sharing. Above all, we need more transparency about the development of risk sharing and there needs to be more focus on the impact of up-front risk sharing the ability of small and mid-size mortgage lenders to access the secondary market through the GSEs.
“FYI, here is a link to a Housing Wire CHLA Op-Ed from November on GSE issues – just below that is excerpted paragraphs about our concerns about up-front risk sharing. ‘CHLA supports risk sharing – but is concerned about up-front risk sharing through securitizations by a few big vertically integrated bank/securities firms. These mega-banks could leverage risk-sharing securitization to generate funds to exclusively originate GSE loans through an affiliated bank. There are already two such deals totaling $2 billion with JPMorgan Chase. If this becomes the dominant form of risk sharing, small and mid-size firms could be shut out of the process. FHFA and the GSEs should be fully transparent about these risk sharing deals – and should ensure that small and mid-size lenders aren’t shut out – by banning practices such as volume discounts and stopping mega-banks from dominating both risk sharing securitization and underwriting of the loans they fund.’”