HOUSING FINANCE REFORM AND REGULATION OF THE GOVERNMENT SPONSORED ENTERPRISES (GSES)
- ICBA supports housing finance reform which is needed to encourage the return of private capital and to protect taxpayers from another bailout.
- FHFA must ensure that the GSEs operate in a safe sound manner. FHFA must require both GSEs to retain earnings and, over time, build capital to a level that adequately supports their operations and protects U.S. taxpayers from future bailouts.
- FHFA should not divert GSE revenues to the Affordable Housing Trust Funds or other housing funds until both GSEs are adequately capitalized and no longer under Conservatorship.
- Robust secondary market access is critical for community banks to support mortgage lending demand in their communities, particularly the demand for long-term, fixed-rate lending.
- Any reform of the housing finance system must preserve aspects of the current GSE secondary mortgage market structure that have worked well for community banks: equitable access for lenders of all sizes, no competition at the retail level, and retention of mortgage servicing rights on transferred loans.
- Community banks must be able to sell loans on a single loan basis for cash, effectively hedge interest rates, and offer rate-locks at low cost.
- The GSE secondary market structure must not be turned over to the largest national lenders and Wall Street institutions.
- Secondary market sales must be relatively simple. A process that requires complex credit enhancements, for example, will disadvantage community banks and other small lenders that lack the scale or resources to obtain and manage such enhancements from multiple parties.
- Any successor to the GSEs must have a specific duty to serve all markets, including small towns and rural areas. Appraisal and underwriting guidelines must be flexible enough to accommodate the unique characteristics of these markets.
- ICBA is committed to preserving the 30-year fixed-rate mortgage for creditworthy customers in all markets.
- The recent financial crisis demonstrated that some type of government tie to the secondary market is needed to ensure the continued flow of credit. Any government catastrophic loss protection must be fully and explicitly priced into the guarantee fee and the loan-level price.
- As stakeholders in the FDIC Deposit Insurance Fund, ICBA is concerned with proposals that would provide covered bond investors superior rights in receivership that are not provided to other secured creditors.
Structure and Regulation of the Federal Home Loan Bank System
- The Federal Home Loan Banks (FHLBs) must remain a strong, stable, reliable source of funding for community banks.
- The FHLBs’ special functions and purposes must be recognized and maintained under the Federal Housing Finance Agency (FHFA).
- The regional structure and cooperative nature of the FHLB system must be maintained as they best address the diverse needs of community bank members.
- ICBA strongly opposes any attempt by the FHFA to impose any type of housing mission asset test either at application for FHLB membership or on an ongoing basis.
- Many community banks rely on the FHLBanks’ mortgage programs for access to the secondary market. While this access point should be preserved, ICBA is concerned about proposals that would rely on the FHLBanks as the sole aggregators for community banks. Advances should remain the FHLBanks’ primary focus. In addition, ICBA opposes any legislation that will permit any new types of non-depositories to access any FHLBank program or service either directly or indirectly.
Community banks represent approximately 20 percent of the mortgage market, and secondary market sales are a significant line of business for many community banks. According to a recent ICBA survey, nearly 70 percent of community bank respondents sell half or more of the mortgages they originate into the secondary market.1 While many community banks choose to hold most of their mortgage loans in portfolio, robust secondary market access remains critical for them to support mortgage lending demand. This is particularly true for fixed-rate lending. For a community bank, it is prohibitively expensive to hedge the interest rate risk that comes with fixed-rate lending. Secondary market sales eliminate this risk.
There is widespread agreement the secondary market must be reformed to prevent or greatly reduce the risk of devastating market failures that hobbled our economy. There is bipartisan consensus that, as the market recovers, the government’s dominant role in the housing market should be reduced to its more traditional role (less than 50 percent of secondary market sales). The private sector should return to its traditional role of providing the majority of the capital in mortgage finance. ICBA welcomes the return to a more balanced and less concentrated housing finance system with an appropriate role for portfolio lenders, originate-and-sell lenders, and small as well as large lenders. If implemented thoughtfully, such a system would reduce the moral hazard and taxpayer liability of the current system. Pending comprehensive reform, FHFA should require both GSEs to retain earnings and build capital in order to protect taxpayers from another bailout. In particular, FHFA should not divert GSE revenues to the Affordable Housing Trust Funds or other housing funds until both GSEs are adequately capitalized and no longer under conservatorship.
The current GSE secondary mortgage market structure has worked well for community banks by providing equitable access, not competing at the retail level, and permitting community banks to retain mortgage servicing rights on the loans they sell.
Community banks selling directly to the GSEs today enjoy a very liquid market that permits them to effectively hedge interest rate risk and offer rate locks to their customers with relative ease and at a low cost. They access this market on a single loan basis, enjoy a virtually paperless loan delivery process, and generally receive funding from the GSEs in cash within 24 to 48 hours. Any new system of housing finance must be able to match the clear advantages of direct GSE sales enjoyed by community banks today.
Under the current GSE model, selling loans is relatively simple. Banks take out commitments to sell loans on a single-loan basis and are not required to obtain complex credit enhancements except for private mortgage insurance for loans in excess of 80 percent loan-to-value or other guarantees. Any future secondary market structure must preserve this relatively simple process for community banks and other small lenders that individually do not have the scale or resources to obtain and manage complex credit enhancements from multiple parties.
In creating a new housing finance system to address the problems of the old system and restore balance among portfolio lenders, small financial institutions, and large lenders, policymakers must be careful not to create a new system that eradicates liquidity for all but the 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.
The Federal Home Loan Banks
The vast majority of community banks are FHLB members and are active advance users or look to them as an alternative source of liquidity. Throughout the financial crisis, the FHLBs continued to provide advances to their members without disruption, while other segments of the capital markets ceased to function. Daily, community banks depend on their FHLBs for liquidity, asset/liability management and to enable them to match fund longer term loans. ICBA will work to ensure that as the administration and Congress consider changes to the housing finance system, the FHLBs remain a healthy, stable, reliable source of funding, liquidity and other products to serve the needs of all member-owners and help them provide lendable funds for the local communities they serve.
Regulation. The FHLBs are under the Federal Housing Finance Agency (FHFA) which also regulates Fannie Mae and Freddie Mac. The FHLBs have a unique mission, ownership, operational and capital structure which must be recognized by their regulator. The FHFA should not go forward with any regulations that would re-impose a mission asset test on community financial institutions. Congress has consistently moved to expand access to the FHLBs rather than restrict it. This authority lies solely with Congress and not the FHFA.
System Structure. The FHLB system is owned and governed by its members and any move towards consolidation should develop from the grass roots level, based on what members perceive to be the best operational and/or geographic structure for their district FHLB to meet their needs. The regional structure of the FHLB system must be maintained as it best addresses the diverse needs of community bank members. The cooperative nature of the system also must be maintained with membership having a strong voice in governance. ICBA recognizes the need for both large and small institution membership and the benefits both bring to, and derive from, the system.
1 ICBA Mortgage Lending Survey. September 2014.