Housing Finance Reform and Regulation of GSEs

Position

  • ICBA supports housing finance reform to preserve market liquidity, protect taxpayers, encourage the return of private capital, and ensure a stable national mortgage market for all stakeholders.
  • The Federal Housing Finance Administration (FHFA) must take steps to end the destructive sweep of GSE earnings that will bleed all capital from the GSEs to the Treasury, result in another taxpayer bailout, and possibly cause disruption in the housing market.
  • Housing finance reform effort must provide robust and equitable secondary market access for lenders of all sizes, no competition or their successors at the retail level, and retention of mortgage servicing rights on transferred loans. The GSE secondary market structure must not be turned over to the largest national lenders and Wall Street institutions.
  • 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.
  • 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.
  • ICBA supports a government guaranty on GSE-issued MBS as catastrophic loss protection that is fully and explicitly priced into the guarantee fee and the loan-level price.

Background

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 an ICBA survey, nearly 70 percent of community bank respondents sell half or more of the mortgages they originate into the secondary market. 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 that GSE reform is needed 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). 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. Risk sharing or loss sharing transfers from the GSEs to the private market must not disrupt TBA market liquidity or contribute to further consolidation of the mortgage business. In particular, FHFA should not divert GSE revenues to the Affordable Housing Trust Funds or other housing funds until both GSEs are adequately capitalized.

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.

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.

Staff Contacts: Ron Haynie