The nation’s trade groups representing mortgage lenders and financial institutions delivered their suggestions for improving the secondary mortgage market to Congress, with much emphasis placed on protecting smaller players.
The Senate Committee on Banking, Housing and Urban Affairs held a hearing Tuesday entitled, Housing Finance Reform: Protecting Small Lenders Access to the Secondary Market.
Testifying at the hearing were officials from the American Bankers Association, the Independent Community Bankers of America and the Mortgage Bankers Association.
MBA Chairman-Elect Bill Cosgrove said in prepared testimony that 7,400 lenders originated mortgages in 2012. Fannie Mae and Freddie Mac each have a thousand of those lenders approved as direct sellers, and Ginnie Mae has 250 issuers approved.
“The vast majority of these lenders are smaller independent mortgage bankers and community banks,” Cosgrove testified. “In fact, according to the most recent HMDA data, independent mortgage bankers represent 11 percent of all lenders nationwide, yet they originated 40 percent of all purchase money mortgages in 2012.”
ICBA Chairman Bill Loving noted that community bankers account for around 20 percent of the mortgage market. Around 30 percent of this group sell their home loans on the secondary market.
MBA’s Cosgrove — who is chief executive officer of Union Home Mortgage Corp., a 278-employee firm based in Cleveland that reports 50,000 loans originated since 1999 — said he sees the importance of small lenders rising over the next year as the mortgage market transitions from refinance to purchase.
Both banking groups called for protection to secondary market access by small financial institutions.
“In reforming the housing finance system, policymakers must be careful not to create a new system that eradicates liquidity for all but the few largest players, limits access to the market or narrows options for smaller lenders, and imposes requirements that make it too costly for smaller lenders and servicers to participate,” stated ICBA Chairman Bill Loving, who also noted that his group welcomes the return to a more balanced and less concentrated housing finance system.
MBA’s Cosgrove said that the secondary mortgage market needs to provide price certainty that matches the risk of the underlying loan. It needs to maintain ease of delivery while executing quick fundings. The secondary system also needs to allow for execution of servicing-retained and servicing-released transactions.
In addition, a reformed second market should enable execution of single-loan sales and small pool execution with a low minimum pool size, the MBA official said.
“Single-family lenders should be able to utilize familiar credit enhancement options, such as mortgage insurance, to facilitate secondary market transactions in a timely and orderly way,” Cosgrove stated. “Key functions present in today’s secondary market system should be preserved, while allowing new forms of private credit enhancement to develop over time.”
He called on Congress to ensure a smooth transition in secondary market reform.
The associations called for caution in transitioning from the government-sponsored enterprise model, which the ICBA said worked well for its members.
“Key GSE assets, including technology, systems, data, and people, should be preserved and redeployed as part of any transition associated with GSE reform,” MBA’s Cosgrove explained. “For example, certain assets could be moved into the Common Securitization Platform.”
Other GSE assets like automated underwriting systems could be made available through a public leasing program. They could also be auctioned with the condition that all market participants are insured access.
Community bankers called for a gradual and transparent transition from the GSEs to any new secondary market structure.
MBA is asking Congress to consider expanding membership in the Federal Home Loan Bank System to non-depository mortgage lenders. Cosgrove says this group consists of smaller, community-based mortgage bankers or servicers focused on providing mainstream mortgage products and services.
ABA Chairman Jeff Plagge testified that limited expansion of the FHLB’s role may also be an option as long as community banks’ access to traditional advances aren’t harmed.
ICBA’s Loving told lawmakers that the FHLBs need to be preserved as an access point to the national secondary market for community banks.
Cosgrove highlighted S. 1217, Housing Finance Reform and Taxpayer Protection Act of 2013, which he said proposes a system that is closer in many respects to Ginnie’s model. Lenders are issuers who are responsible for obtaining private credit enhancement before delivering pools of loans to the central securitization platform for the government guaranty.
But while the approach might work for some lenders, it could be too operationally difficult for many smaller lenders.
The senate bill, which was introduced in June by Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.), does provide an alternative for smaller lenders in the form of a mutual securitization cooperative, but the mortgage bankers cautioned that broad standards for a mutual should ensure a fair governance process that doesn’t advantage one class of mutual shareholders over another.
ABA’s Plagge acknowledged the need for a government guarantee available to banks of all sizes and charter types. He supports the creation of a mutual entity as long as it is economically viable has an appropriate governance structure.
Plagge noted that any government guarantee must be explicit, priced into the cost of each loan and — most importantly — available to eligible primary market lenders of all sizes, charter types, geographic locations secondary market volumes.
“It’s equally important to ensure that end state reforms address the variety of ways that small lenders access the secondary market, and that any mutual company created is not the only option for small lenders,” Cosgrove stated.
The ICBA said that only Qualified Mortgages should be eligible for securitization or sale to the secondary market and contain a government guaranty.
Plagge said that mortgage market should be predominantly filled by the private sector. He said that equal access, equal pricing, multiple channels and reasonable capital requirements are needed to ensure community banks have access to a federally guaranteed secondary market.
“Reforming the mortgage market will be a complex undertaking with far-reaching consequences for our economy,” Plagge testified. “It must be undertaken in a thoughtful, orderly manner, and done with a careful transition over a number of years to ensure that the mortgage markets are not destabilized.”
