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Bankers Debate Future of Fannie, Freddie

ABA holds annual conference in Chicago

Nov. 2, 2009


CHICAGO -- As U.S. bankers pondered the future of Fannie Mae and Freddie Mac at a conference last week, protestors demonstrated outside the event.

The American Bankers Association held its Annual Convention Business Expo and Directors' Forum last week from Sunday through Wednesday in Chicago.

Attendance at this year's event was 1,500, according to John Hall, senior vice president, public relations. Attendance was down from 1,600 at last year's convention held in San Francisco despite that the financial markets had nearly collapsed the month before.

While bankers were involved in presentations and discussions about the government sponsored enterprises, the secondary market and commercial real estate lending -- about a thousand demonstrators protested outside every day over foreclosures, predatory lending and rising mortgage rates. They even protested payday lending, linking these problems to what they saw as a coalition of Wall Street investment firms and banks. But mortgage bankers or mortgage brokers were not mentioned.

This led the bankers group and individual bankers to question the protestors' presence.

Lenders need to have more skin in the game for the GSEs to have a future -- a future that might include nationalizing Fannie Mae and Freddie Mac as a single entity or two separate entities or merging them with Federal Housing Administration or Ginnie Mae, according to presentations at a session of the future of the GSEs.

Nationalization of Fannie and Freddie would bring to the situation the moral hazard of government insurance, cautioned James B. Lockhart III, vice chairman of New York-based WL Ross & Co. and the former director of the GSE's regualtor, the Federal Housing Finance Agency.

He also called for an improved GSE model that might include a reduction in retained portfolios, government insurance for only catastrophic risk, and, possibly, cooperative ownership.

And greater liquidity in the mortgage market could be created by the establishment of private-sector firms, he suggested.

Whatever the final outcome, Lockhart said that the GSEs' future should be based on four principles:

  1. A well-defined and consistent mission,

  2. A clear demarcation of private and public sector roles,

  3. A regulatory and governance structure to ensure prudent risk taking, and

  4. Systemically prudent supervision that incorporates counter-cyclical capital to limit booms and busts.

Such counter-cyclical policies as capital requirements, pricing, catastrophic insurance and contingent equity could be used to curb asset price bubbles and dampen credit cycles, Lockhart noted.

Matt Feldman, president and chief executive officer of the Federal Home Loan Bank of Chicago, cited the FHLB Mortgage Partnership Finance Program's risk sharing by lenders and investors as something that the GSEs might follow. The proposal that lenders have a 5 percent level of "skin in the game" would not be feasible for mortgage lenders, he said.

The risk-sharing structure of the MPF program, in which six of the 12 Federal Home Loan Banks participate, places all interest rate and prepayment risks with investors while investors and lenders share credit risks, he pointed out. As a result, the 90+ day delinquency rate at mid-year was only 0.97 percent for MPF loans. But delinquency for all loans is 3.52 percent, nearly 4.00 percent for Fannie and about 3.75 percent for Freddie.

In addition to holding some of the credit risk on the loans they sell, lenders using the MPF program also have a second type of "skin in the game" by holding equity in this secondary market entity, Feldman explained.

Banker interest in participating in the MPF program was expressed at a session on the program, which began 12 years ago as an alternative to Fannie and Freddie.

"The response was good," Brian Harris, a vice president of the program, told

A number wanted more detailed information, with several wanting to get daily pricing that could be compared with figures from the "alternatives" they have, that is, Fannie and Freddie, before making a decision whether to join the program, he explained.

"We've heard that the alternatives are less today than they were yesterday," Harris said, explaining why there has been greater interest and participation in the program in the past year.

Jerry DeMuth is an award winning journalist who has been reporting for four decades.

e-mail Jerry at [email protected]
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