Published by Scotsman Guide on August 1, 2017
By William Giambrone
Recently, I had the privilege of testifying before the U.S. Senate banking committee on behalf of the Community Home Lenders Association (CHLA) on reform of the government-sponsored enterprises, or GSEs.
The hearing brought together associations representing different types of small lenders. CHLA is the only national association exclusively representing independent mortgage bankers (IMBs). I presented CHLA’s position on how reform of the GSEs Fannie Mae and Freddie Mac should be done in a way that protects IMBs.
Our testimony addressed key small-lender issues — explaining CHLA’s GSE reform plan, which has as its top objective maintaining full and equal small-lender access to the secondary market. This is needed to ensure competition and to maximize consumer access to affordable mortgage credit through community lenders that serve borrowers where they live and work, including rural and other underserved markets.
Our testimony led with the recommendation that Federal Housing Finance Agency (FHFA), which oversees the GSEs, should act immediately to suspend GSE dividends, to build a modest capital buffer, and avoid a Treasury advance caused by the sweep agreement. CHLA and a broad range of small-lender and affordable-housing groups support this step — not because it might be good for Fannie or Freddie or their shareholders, but because their regulator, FHFA Director Mel Watt, has stated that the GSEs’ lack of capital is their “greatest risk.” It also makes no sense for these entities to have zero capital.
We presented a strong case as to why Fannie Mae and Freddie Mac should be preserved — a position held by all six of the small-lending groups at the hearing — in order to maintain full and equitable access to both the cash window and to securitization execution.
Our testimony stated that Congress should not authorize new charters to compete with Fannie and Freddie particularly banks or vertically integrated investment banks. Ranking committee member Sherrod Brown, D-Ohio, followed up on a line of questioning by Sen. Bob Menendez, D-N.J., to ask if the other groups agreed with CHLA’s “no new charter” position. All five of the other small lender groups concurred.
This policy position does not just protect small lenders. It also guards against increasing the financial concentration of the “too big to fail” financial institutions. A recent speech by Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig noted that the four largest U.S. banks went from holding 14 percent of total industry assets in 1992 to 42 percent today — adding that these big banks now “dominate the industry and increasingly dominate our economy.”
My oral statement before the Senate committee warned that, “We do not want this to happen to the mortgage industry. We believe it will happen if charters are granted to big banks and other ‘too-big-to-fail’ entities like investment banks or insurance companies.”
Another consensus held by all the small-lender panelists at the hearing, as well as most of the committee members, was strong opposition to volume discounts. CHLA has applauded the FHFA for bringing virtual parity to GSE pricing and supports guarantee-fee (g-fee) parity in legislation.
But CHLA believes that parity should apply to more than just g-fees. Our testimony called for full pricing transparency; extending parity to buy-up/buy-down grids and risk-sharing pricing; bans on special underwriting deals and variances for selected lenders; and equal treatment for reps and warrants.
Our testimony also focused on the need to do risk sharing the right way. Up-front risk sharing poses a risk to small lenders — either that large vertically integrated companies will use risk-sharing funds from investor clients to exclusively fund government-backed mortgages for their bank affiliates or that risk sharing could be a back door to reinstating volume discounts. The CHLA approach is simple: All risk sharing should be done on the back end, which also creates a broad, diversified investment market for the risk sharing.
Senate committee members specifically cited CHLA’s concerns about the risks of “vertical integration” by the large Wall Street firms. We also were very encouraged by the fact that both Republican and Democratic banking committee members were strongly supportive of preserving small mortgage-lender access to the secondary market in GSE reform.
Every member of Congress needs to hear this message. IMBs and other small mortgage lenders need to take their case to Congress directly, telling their member of Congress that the future of small mortgage lenders — and the consumers we all serve — needs to be a priority.
William Giambrone is president of the Community Home Lenders Association and president of Platinum Home Mortgage. He can be reached at (847) 797 9500. The viewpoints expressed by authors do not necessarily reflect the opinions of Scotsman Guide Media.