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ICBA Offers Key Principles for Future Housing Finance System

Community Banks Need a Strong Secondary Market to Continue to Serve Their Customers

Washington, D.C. (July 22, 2010)-The Independent Community Bankers of America (ICBA) said in a comment letter to the Treasury Department and Department of Housing and Urban Development that the nation's housing finance system must continue to be sufficiently flexible so it provides a variety of finance options to meet the needs of different consumers, housing types and locations. ICBA outlined its key principles for the reform of the housing finance system that is now under debate.

"Community banks need a stable secondary market for residential mortgages because without a reliable secondary market, many community banks would be unable to offer residential mortgages to their customers," ICBA said in the letter.  "Clearly changes are needed so that the recent housing finance problems are not repeated.  Fortunately, a renewed focus has been placed on the traditional ‘common sense' underwriting practices long embraced by community banks-making sure the loan is affordable for the borrower and the borrower has the ability to repay the loan."  ICBA also stated that care must be taken so changes do not disrupt the recovery of the housing finance system.

ICBA outlined the following key principles for the future structure of the secondary market for residential mortgages:

  • The secondary market for residential mortgages must be impartial to provide equitable access and pricing to all lenders.
  • The secondary market must be financially strong and reliable.
  • The secondary market entities must have a limited mission focused on supporting residential and multifamily housing in all communities in the United States.
  • The secondary market entities need to have the operational flexibility to hold some mortgages in portfolio when market conditions dictate, along with their securitization authorities.
  • The conflicting requirements of a public mission with private ownership must be eliminated.
  • An appropriate capital structure, including the accumulation of retained earnings, must be an important component of the secondary market structure to attract and maintain capital and to protect user or private capital.
  • Congress must ensure that a secondary market with government ties continues to exist.
  • More than one secondary market entity should exist in the future to foster competition.
  • The function of Fannie Mae and Freddie Mac should not be incorporated into the Federal Home Loan Bank system.
  • Congress should consider requiring the secondary market entities to dedicate a portion of their earnings to support housing programs in a form such as the FHLBank Affordable Housing Programs in return for the benefits of GSE status and in the place of the current housing goals.

ICBA also said that an unfortunate byproduct of the government's takeover of Fannie Mae and Freddie Mac was that the value of GSE preferred shares plummeted, injuring more than a thousand community banks that purchased these shares with the encouragement of their regulators. ICBA urged Treasury to correct this injustice by restoring the dividend payments on these preferred shares.

Additionally, ICBA addressed the importance of the Federal Home Loan Banks.  "Throughout the financial crisis, the FHLBanks continued to provide advances to their members without disruption, while other segments of the capital markets ceased to function," ICBA said.  "Community banks depend on their FHLBanks daily for liquidity, asset/liability management and to enable them to match fund longer term loans."

As the administration and Congress consider changes to the housing finance system, ICBA said that it supports the regional structure of the FHLBanks and that the FHLBanks must remain a healthy, stable and 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. 

To read ICBA's comment letter, visit www.icba.org