Community Lenders want Smaller GSEs Retained in Secondary Market Role

By: Jann Swanson •

The Community Mortgage Lenders of America (CMLA) is urging policy makers to consider retaining the positive aspects of Fannie Mae and Freddie Mac in any future secondary market design.  CMLA is asking that a smaller Fannie and Freddie be configured to serve 30-35 percent of the overall secondary mortgage market while being barred from securitizing or investing in anything but plain "vanilla" mortgages.

The trade association stated its preferences in a letter to the secretaries of Housing and Urban Development (HUD), Treasury, and the Acting Director of the Federal Housing Finance Agency (FHFA) as well as the chairs and ranking members of two congressional committees which will be involved in the future definition of the market.    

CML said the two government sponsored enterprises (GSEs) have benefited from the strong oversight and leadership they have received from FHFA and that has been reflected in the housing market where credit has remained available primarily because of their presence.  While the housing industry, Congress, Treasury, HUD, and the FHFA are seeking clarity on how the GSEs should perform going forward, CMLA "believes that the housing industry and the public at large are best served through a sensible and calculated reformation of the GSEs that reduces their footprint in the industry while at the same time allowing them to serve their historically critical functions."

The CMLA endorses a future whereby Fannie and Freddie shrink to serve 30-35 percent of the overall secondary mortgage market, and are barred from securitizing or investing in anything but plain "vanilla" mortgages.

While the FHFA's October 2011 projections shows that the balance sheets of the GSE's are improving, FHFA has also expressed doubt that they will ever be able to repay the government its investment during the crisis.  CMLA believes that the taxpayer can be repaid through creative and thoughtful planning and through tailoring an increase in guarantee fees to more accurately price risk. 

There are a number of principles that should inform creation of a fair and effective secondary mortgage market according to CMLA:

1.   Standardization reduces costs

2.   Liquidity is needed

3.   Conventional lending should be protected

4.   Loss mitigation procedures should be retained and further enhanced

5.   Risk must be made explicit

6.   Market concentration should be reduced

7.   Portfolio flexibility should be increased

8.   Proper use of Guarantee Fees must be required

9.   Reform must include standards for the non-GSE Secondary Market.

The letter states that a sensible and calculated reformation of the GSEs will result in continued liquidity and stability without an unnecessary disruption to the secondary market, "or worse, a concentration of the secondary market within a limited number of large banks/servicers."  CMLA sets out the following steps for the GSEs to complete within a transition time and recognizing market realities.

  • Pay an explicit backstop fee to the federal government;
  • Be prevented by statute from securitizing or investing risky mortgages as defined by the Qualified Residential Mortgage Rule;
  • Be shrunk and normalized to sustain roughly 30 to 35 percent of the secondary market
  • Continue to be required to serve lenders of all sizes and to nurture smaller markets in areas of market concentration;
  • Continue to provide standardization of origination documentation, servicing practices, securitization terms and modification/foreclosure strategies as a policy of consumer protection;
  • Reduce and maintain portfolios over time, but only as transitional market pricing reduces the portfolios. Given that the portfolios provide a stabilizing influence of mortgage pricing and that the FHFA has said the portfolios will only cause 9 percent of overall losses "any forced downsizing seems politically motivated to benefit large banks and Wall Street."
  • Establish a governing board to maintain and set a competitive guarantee fee following the public utility model with funds generated to be retained in the housing industry for the benefit of taxpayers;
  • Regulate post-conservatorship executive compensation through a governing board to prevent excessive risk-taking.

CMLA says it is the first trade group to call for the GSEs to remain intact.  Mark McDougald, Chairman of the organization said, "Our plan is forward-looking and will result in distinct changes in the secondary market. However, we call on Washington to move expeditiously and to avoid drastic, politically-driven changes that will harm small lenders and the small communities in which they serve,"