Community Lenders want Smaller GSEs Retained in Secondary Market Role

by devteam June 6th, 2012 | Share

The Community Mortgage Lenders ofrnAmerica (CMLA) is urging policy makers to consider retaining the positive aspectsrnof Fannie Mae and Freddie Mac in any future secondary market design.  CMLA is asking that a smaller Fannie andrnFreddie be configured to serve 30-35 percent of the overall secondary mortgagernmarket while being barred from securitizing or investing in anything but plain “vanilla”rnmortgages. </p

The trade association stated itsrnpreferences in a letter to the secretaries of Housing and Urban Developmentrn(HUD), Treasury, and the Acting Director of the Federal Housing Finance Agencyrn(FHFA) as well as the chairs and ranking members of two congressionalrncommittees which will be involved in the future definition of the market.    </p

CML saidrnthe two government sponsored enterprises (GSEs) have benefited from the strongrnoversight and leadership they have received from FHFA and that has beenrnreflected in the housing market where credit has remained available primarilyrnbecause of their presence.  While thernhousing industry, Congress, Treasury, HUD, and the FHFA are seeking clarity onrnhow the GSEs should perform going forward, CMLA “believes that the housingrnindustry and the public at large are best served through a sensible and calculatedrnreformation of the GSEs that reduces their footprint in the industry while atrnthe same time allowing them to serve their historically critical functions.” </p

The CMLA endorses a future whereby Fannie andrnFreddie shrink to serve 30-35 percent of the overall secondary mortgage market,rnand are barred from securitizing or investing in anything but plainrn”vanilla” mortgages. </p

While the FHFA’s October 2011 projections showsrnthat the balance sheets of the GSE’s are improving, FHFA has also expressedrndoubt that they will ever be able to repay the government its investment duringrnthe crisis.  CMLA believes that therntaxpayer can be repaid through creative and thoughtful planning and throughrntailoring an increase in guarantee fees to more accurately price risk.  </p

There are a number of principles that shouldrninform creation of a fair and effective secondary mortgage market according tornCMLA:</p

1.  rnStandardization reducesrncosts</p

2.  rnLiquidity is needed</p

3.  rnConventional lendingrnshould be protected</p

4.  rnLoss mitigationrnprocedures should be retained and further enhanced</p

5.  rnRisk must be madernexplicit</p

6.  rnMarket concentrationrnshould be reduced</p

7.  rnPortfolio flexibilityrnshould be increased</p

8.  rnProper use ofrnGuarantee Fees must be required</p

9.  rnReform must includernstandards for the non-GSE Secondary Market.</p

The letter states that a sensible and calculatedrnreformation of the GSEs will result in continued liquidity and stabilityrnwithout an unnecessary disruption to the secondary market, “or worse, arnconcentration of the secondary market within a limited number of largernbanks/servicers.”  CMLA sets out thernfollowing steps for the GSEs to complete within a transition time andrnrecognizing market realities.</p<ul class="unIndentedList"<liPay an explicitrnbackstop fee to the federal government;</li<liBe prevented byrnstatute from securitizing or investing risky mortgages as defined by thernQualified Residential Mortgage Rule;</li<liBe shrunk andrnnormalized to sustain roughly 30 to 35 percent of the secondary market</li<liContinue to be requiredrnto serve lenders of all sizes and to nurture smaller markets in areas of marketrnconcentration;</li<liContinue to providernstandardization of origination documentation, servicing practices,rnsecuritization terms and modification/foreclosure strategies as a policy ofrnconsumer protection;</li<liReduce and maintainrnportfolios over time, but only as transitional market pricing reduces thernportfolios. Given that the portfoliosrnprovide a stabilizing influence of mortgage pricing and that the FHFA has saidrnthe portfolios will only cause 9 percent of overall losses "any forced downsizingrnseems politically motivated to benefit large banks and Wall Street."</li<liEstablish a governingrnboard to maintain and set a competitive guarantee fee following the publicrnutility model with funds generated to be retained in the housing industry forrnthe benefit of taxpayers;</li<liRegulaternpost-conservatorship executive compensation through a governing board tornprevent excessive risk-taking.</li</ul

CMLA says it is the first trade group to call forrnthe GSEs to remain intact.  MarkrnMcDougald, Chairman of the organization said, “Our plan is forward-lookingrnand will result in distinct changes in the secondary market. However, we callrnon Washington to move expeditiously and to avoidrndrastic, politically-driven changes that will harm small lenders and the smallrncommunities in which they serve,”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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