July 20, 2017
Senate Banking Committee – “Housing Finance Reform: Maintaining Access for Small Lenders”
Key Topics & Takeaways
- Secondary Market Access for Small Lenders: Much of the hearing revolved around the importance of small lenders to the national housing market and on ways that Congress can ensure small lenders can continue to access the secondary market. Within this topic, discussion tended to focus on 1) pricing arrangements for small lenders trying to sell loans into the secondary market through the cash window, and 2) ways the government-sponsored enterprises (GSEs) could reduce small lenders costs, such as through standardization of practices. Witnesses were uniformly opposed to any kind of volume-based pricing system for selling loans into the secondary markets.
- Brenda Hughes, SVP, First Federal Savings Bank of Twin Falls, on behalf of the American Bankers Association (ABA)
- Tim Mislansky, SVP and Chief Lending Officer, Wright-Patt Credit Union, on behalf of the Credit Union National Association (CUNA)
- Jack Hopkins, President and CEO, CorTrust Bank, on behalf of the Independent Community Bankers of America (ICBA)
- Charles Purvis, President and CEO, Coastal Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (NAFCU)
- Wes Hunt, President, Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America (CMLA)
- Bill Giambrone, President and CEO, Platinum Home Mortgage, and President, Community Home Lenders Association (CHLA)
In his opening statement, Chairman Mike Crapo (R-Idaho) introduced the hearing’s purpose and talked about the importance of small lenders to the national housing market, especially in rural and low-density areas. Crapo also enunciated his principles for bipartisan housing finance reform, which were: 1) ensuring small lender access to the secondary market 2) preserving the 30-year fixed rate mortgage and the To-Be-Announced (TBA) market 3) having private capital in front of any government guarantee of mortgage-backed securities (MBS) and 4) having an orderly transition from the current conservatorships to a new system.
In her opening statement, Ranking Member Sherrod Brown (D-Ohio) talked about the importance of small lenders to smaller housing markets. Brown noted that small lenders often serve areas ignored by larger lenders and have granular knowledge of their communities and customers that helps them make loans. Brown criticized the Corker-Warner bill (considered in the 113th Congress) for having insufficient protections for small lenders trying to access the secondary market for mortgages, and said that housing finance reform should not advantage large lenders in that space.
Brenda Hughes, SVP, First Federal Savings Bank of Twin Falls, on behalf of the American Bankers Association (ABA)
Hughes began her testimony by stressing the need for any housing finance reform package to preserve secondary market access for small lenders, and to have a government guarantee on qualifying MBS. Hughes also laid out the ABA’s principles for housing finance reform.:
- The GSE’s should be confined to a secondary market role. In return for GSE status, these entities must agree to support all segments of the primary market.
- Preservation of the TBA Market
- Agency MBS should have an explicit government guarantee paid for by a guarantee fee
- The GSE’s should be strongly capitalized
- Credit risk transfers (CRT) should be expanded
- Congress should adopt a “surgical approach” to reform that does not try to totally overhaul the secondary market infrastructure
Tim Mislansky, SVP and Chief Lending Officer, Wright-Patt Credit Union, on behalf of the Credit Union National Association (CUNA)
In his testimony, Mislansky warned that without equal access to the secondary markets, small lenders may have to cut back on their mortgage lending. Mislansky talked about the importance of credit unions to the national housing market, and noted that credit union loans held up well during the 2008 crisis. Mislansky also outlined CUNA’s principles for housing finance reform, which were:
- Have a neutral third party to regulate the secondary market
- The secondary market must be open to lenders of all size on independent basis
- The GSE’s should have an explicit, government-wrap for catastrophic risk
- Any reform should encourage consumer education
- An orderly transition when the conservatorship is ended
- Preservation of fixed-rate mortgages
- “Reasonable conforming loan limits, particularly for credit unions, that often supply small housing loans.
- Government support for affordable housing should be considered a separate function of the GSE’s
Jack Hopkins, President and CEO, CorTrust Bank, on behalf of the Independent Community Bankers of America (ICBA)
In his testimony, Hopkins discussed the importance of community banks to rural areas and small towns, where they are often the sole option for financing home purchases. Hopkins stressed the importance of secondary market access for community banks, which allows them to expand their balance sheet and make additional loans. Hopkins also discussed ICBA’s recommendations for housing finance reform, which were:
- GSE’s should rebuild their capital buffers to reduce risk
- Community banks should have access to the secondary markets with the same terms and pricing as large lenders
- Community banks should be allowed to retain their servicer relationships
- An explicit government guarantee should be granted to qualifying MBS
Charles Purvis, President and CEO, Coastal Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (NAFCU)
In his testimony, Purvis described his credit union’s mortgage lending business and said his firm held most of its mortgages in portfolio before the 2008 financial crisis. Purvis said that selling its mortgages into the secondary market allowed Coastal to increase its mortgage lending operations in its communities and reduce its balance sheet risk, and said “viable secondary market is critical to our success as a community lender.” Purvis said that he did not believe previous housing finance reform proposals went far enough in protecting secondary market access for small lenders. Purvis also outlined NAFCU’s priorities for housing finance reform, which were:
- Access to the secondary market for small lenders
- All MBS should carry a full government-backed guarantee
- The GSE’s should be self-funded but not privatized
- The GSE’s should rebuild their capital buffers
- Credit risk transfer transactions should be expanded and a common securitization platform enacted
- Small lenders should continue to receive access to Day One Certainty and Desktop Underwriter – and all GSE technology platforms that are available to market participants.
Wes Hunt, President, Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America (CMLA)
In his testimony, Hunt described the activities of Homestar and in the membership of the CMLA. Hunt said that Congress should recapitalize the GSEs and release them from conservatorship, and that well-capitalized guarantors were critical to housing market stability and meeting affordable housing goals. Hunt said he was concerned that larger firms will be advantaged by housing finance reform, and said any reform should preserve secondary market access for small lenders.
Bill Giambrone, President and CEO, Platinum Home Mortgage, and President, Community Home Lenders Association (CHLA)
In his testimony, Giambrone argued that the Federal Housing Finance Agency (FHFA) should take two steps when it ends the conservatorship, which were 1) to require the GSEs retain $10 billion each as a capital buffer each, and 2) release any capital restoration plan to the public. Giambrone also outlined CHLA’s priorities for housing finance reform, which were:
- Structure and regulate the GSE’s as utilities
- Not grant new charters for guarantors
- Emphasize back-end risk sharing over front-end
- Pricing, underwriting, and variance standards should be uniform between large and small lenders.
Question and Answer
Secondary Market Access for Small Lenders
Much of the hearing revolved around the importance of small lenders to the national housing market and on ways that Congress can ensure small lenders can continue to access the secondary market. Within this topic, discussion tended to focus on 1) pricing arrangements for small lenders trying to sell loans into the secondary market through the cash window, and 2) ways the GSEs could reduce small lenders costs, such as through standardization.
Crapo asked Mislansky to describe the different ways small lenders access the secondary market. Mislansky said that many firms, like his, sell their loans directly at the cash window, while other firms (generally the smallest lenders) will contract with an aggregator to help with underwriting and origination, and sell their loans directly to the aggregator. Brown asked witnesses describe the ways secondary market access helps would-be homeowners, and witnesses agreed that that in many communities, small lenders (ie, community banks and credit unions) supply the bulk of the loans, while large lenders often ignore these areas. Witnesses noted that large lenders have loan minimum sizes that may be too high for rural and low-income areas.
The idea of ensuring pricing consistency across large and small lenders was a recurring theme throughout the hearing and came up repeatedly. Senator Elizabeth Warren (D-Mass.) asked witnesses for their thoughts on ensuring equal access for small lenders to the secondary market, and witnesses uniformly supported requiring the same pricing for large lenders and small ones, saying it is unfair if large lenders receive better prices due to their greater volume. Witnesses were emphatically critical of volume discounts, saying that helps large firms undercut small ones, and said that guarantors should be closely regulated to prevent this from occurring.
Warren also asked the witnesses for their thoughts on preventing large firms from being involved in both the primary and secondary mortgage markets. Giambrone suggested using a “utility model” for the guarantor, restricting its functions to the secondary market, and ensure the secpmdary market is highly regulated. In response to a follow-up question, he also endorsed prohibiting vertical integration in the market. Warren closed by saying that any housing finance reform package should protect low-income borrowers as well as small lenders.
Senator Thom Tillis (R-N.C.) also asked witnesses for thoughts on ways to preserve secondary market access for small lenders. Purvis said that the GSE’s can provide helpful standardization across the industry that reduces costs for small lenders. Purvis said that Desktop Underwriter and the universal homeowner application help small lenders reduce costs, for themselves and for borrowers.
Senator Bob Menendez (D-N.J.) asked witnesses why they thought it was important for community banks and credit unions to retain the servicing arrangements with borrowers. Giambrone said that many customers want the local lender to handle the servicing relationship, and that this is a customer preference.
Senator Tim Scott (R-S.C.) asked witnesses for their thoughts on alternative credit scoring models. Purvis said that the FICO model is decades old and based on loan repayment history, while new data sources can now also capture the creditworthiness of borrowers. Witnesses conceded that for new credit scoring models to work, the data used will need to be carefully validated.
Brown asked witnesses if they believed the housing market should have “no more than two guarantors.” Hunt said the market is already very complex, and increasing complexity will raise the legal and internal costs to small firms. Hunt said that consistency in practices and requirements are extremely important. Hopkins agreed, and said that two guarantors worked effectively for decades (before they lost track of their mission). Hopkins also said that the Common Securitization Platform (CSP) will, when rolled out, help small lenders by providing a uniform security in the secondary market. Menendez also asked witnesses to describe the challenges they would face if new guarantors had different loan standards. Hopkins said that complying with different guarantor requirements would complicate their ability to access the market.
Qualified Mortgage Rule
Senator Catherine Cortez-Masto (R-Nev.) expressed support for giving small lenders a safe harbor from the Consumer Financial Protection Bureau (CFPB)’s Qualified Mortgage (QM) rule, and asked if expanding this safe harbor to large lenders would be dangerous. Hughes agreed, saying that only small firms should be exempted, and only if they keep the loans on portfolio.
For more information on this hearing, please click here.