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Countrywide Had Huge Advantage over Smaller Rivals

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When it comes to the secondary mortgage market, community banks have been at a big disadvantage compared to their mega-producing rivals, according to congressional testimony. Yet loan performance has been better on loans originated by the smaller banks.

The testimony is scheduled for Tuesday before the U.S. Senate Banking, Housing and Urban Affairs Committee’s hearing, Housing Finance Reform: Access to the Secondary Market for Small Financial Institutions.

Speaking before the committee will be Edward J. Pinto, resident fellow at the American Enterprise Institute, according to a copy of his prepared statement.

Pinto, who previously served as Fannie Mae’s chief credit officer, said that community banks have been denied “fair and equal access to the secondary market” for many years. Around 1,200 of the smallest institutions paid higher guarantee fees than the top-25 customers of Fannie and its smaller rival Freddie Mac.

“Fannie and Freddie had a long history of giving their largest and riskiest customers lower guarantee fees, while charging community lenders much higher fees,” Pinto explained. “This denied community financial institutions fair and equal access to the secondary market, disadvantaged them economically, and in many cases resulted in their handing over their best customers to their large bank competitors.”

He called volume discounts on credit guarantee fees “a recipe for disaster.”

By 2007, the advantage helped propel Countrywide Home Loans to a 25 percent market share of total government-sponsored enterprise business. In addition, sellers like Countrywide benefited from looser underwriting standards established to meet affordable housing goals.

Pinto claims that loans from smaller players were of better quality than those from Countrywide. He provided data that indicated the nonperforming rate on GSE loans for 6,232 banks with assets less than $10 billion is just 2.72 percent, while it jumps to 16.27 percent for the four banks with assets in excess of $1 trillion.

At issue in today’s hearing is how the qualified residential mortgage required under the Dodd Frank act will adversely impact small institutions.

Pinto noted that small banks already know how to make quality loans and shouldn’t have to be subjected to the 800 pages of QRM rules that have emerged (so far) from Dodd Frank.

Also testifying today is Jack Hartings, who is president and chief executive officer of The Peoples Bank Co. in Coldwater, Ohio, and a member of the executive committee for the Independent Community Bankers of America.

Like Pinto, Hartings warned about the dangers of concentrating the secondary market into the hands of just a few mega-players. He said players of all sizes should have “equitable access and pricing.”

Hartings explained that community bank lending has been concentrated in rural areas that aren’t served by large banks — adding that community banks are the only option for many borrowers in these areas.

“Community banks are particularly alarmed by proposals that would simply transfer the important functions of Fannie Mae and Freddie Mac to a small group of megabanks — often the same ones whose abusive loan terms, faulty underwriting and exotic securitizations contributed to the financial meltdown,” Hartings said in a prepared statement. “Such proposals would intensify systemic risk and moral hazard through further concentration of assets, and increase dangerous consolidation of the mortgage industry, and result in less competitive rates and fees, and more limited product choice.”

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