No April Fool's Joke!
ICBA won a significant victory for community banks when Sen. Bennett's amendment to give Congress the opportunity to block receivership and repudiation of GSE debt obligations passed the Senate Banking Committee on a close vote. In another victory, Sen. Enzi offered two ICBA amendments that clarify the unique role and mission of the FHLB system and call for a study of alternative investment options for community banks. Both amendments passed. It is perhaps appropriate that the Federal Housing Enterprise Regulatory Reform Act of 2004-better known as the "GSE Bill"-was marked up in the Senate Banking Committee on April 1. As this column was being written, the GSE Bill passed the Senate Banking Committee on a largely party line vote of 12-9.
Although this is April 1, for community banks nationwide GSE legislation is no joke! Community banks depend on Fannie Mae, Freddie Mac and the Federal Home Loan Banks for access to secondary markets, for funding and for an array of financial products. How these entities are supervised, regulated and perceived in the marketplace is of vital importance to community banks and ultimately to the value of the community bank franchise.
There are forces in Washington and among the Wall Street crowd that would like to privatize and marginalize the GSEs, particularly Fannie and Freddie. Their goal is to gain greater market share, and to make community banks dependent on the very largest financial market players for access to products and services. By marginalizing the GSEs they marginalize community banks!! And further their long-range plan.
Among a certain crowd in Washington and on Wall Street, community banks are seen as an unnecessary nuisance that splinters the financial marketplace and makes it less efficient. "Too many banks" they harp! "We need more efficiency and fewer banks."
Cutting community banks off from direct access to market products that enable them to compete on a level playing field with the largest institutions is one way the large institutions can increase their market share.
The GSEs allow community banks to access the same markets as the big players, without having to depend on those big players. That is why ICBA vigorously opposed provisions of the GSE draft bill that gave the new regulator sweeping new receivership powers over Fannie and Freddie with no third party review. ICBA strongly supported Sen. Bennett's amendment that would allow Congress to intervene. ICBA was successful in lobbying this point. As a result community bank debt holders are better protected.
What impact would broad receivership or contract repudiation powers have on the housing finance marketplace? Opponents of such powers (including ICBA) say GSE debt costs and mortgage interest rates will almost certainly increase as, over time, rating agencies downgrade GSE debt and bondholders demand more return for their risk. This result is bad for community banks and bad for consumers.
As both sellers of mortgages to Fannie and Freddie and as significant investors in GSE debt, community bankers and their customers have a major stake in whether the government takes steps to distance itself from the housing GSEs.
Receivership would be the first step down the road to privatization - just the road our opponents want to take. Wrapped in the guise of "sound regulation," the original receivership provisions were a clever way to chip away at the GSE status of Fannie Mae and Freddie Mac. You can't fool us on this April Fool's Day!