[Senate Hearing 113-171]
[From the U.S. Government Publishing Office]
S. Hrg. 113-171
HOUSING FINANCE REFORM: PROTECTING SMALL LENDER ACCESS TO THE SECONDARY
MORTGAGE MARKET
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING COMPONENTS SUCH AS INFRASTRUCTURE, TECHNOLOGY, AND THE CASH
WINDOW, THAT NEED TO BE PRESERVED FOR SMALL LENDERS IN A NEW HOUSING
FINANCE SYSTEM
__________
NOVEMBER 5, 2013
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Glen Sears, Deputy Policy Director
Kari Johnson, Legislative Assistant
Erin Barry Fuher, Professional Staff Member
Adam Healy, Professional Staff Member
Greg Dean, Republican Chief Counsel
Jelena McWilliams, Republican Senior Counsel
Chad Davis, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, NOVEMBER 5, 2013
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
Senator Tester............................................... 3
WITNESSES
Richard Swanson, President and Chief Executive Officer, Federal
Home Loan Bank of Des Moines, on behalf of the Council of
Federal Home Loan Banks........................................ 5
Prepared statement........................................... 30
Responses to written questions of:
Senator Reed............................................. 83
William A. Loving, Jr., President and Chief Executive Officer,
Pendleton Community Bank, Franklin, West Virginia, and
Chairman, Independent Community Bankers of America............. 6
Prepared statement........................................... 48
Responses to written questions of:
Senator Reed............................................. 84
Bill Hampel, Senior Vice President and Chief Economist, Credit
Union National Association..................................... 8
Prepared statement........................................... 52
Responses to written questions of:
Senator Reed............................................. 85
Bill Cosgrove, Chief Executive Officer, Union Home Mortgage
Corp., and Chairman-Elect, Mortgage Bankers Association........ 10
Prepared statement........................................... 62
Responses to written questions of:
Senator Reed............................................. 86
John Harwell, Associate Vice President of Risk Management, Apple
Federal Credit Union, Fairfax, Virginia, on behalf of the
National Association of Federal Credit Unions.................. 11
Prepared statement........................................... 67
Responses to written questions of:
Senator Reed............................................. 87
Jeff Plagge, President and Chief Executive Officer, Northwest
Financial Corporation, Arnolds Park, Iowa, and Chairman,
American Bankers
Association.................................................... 13
Prepared statement........................................... 77
Responses to written questions of:
Senator Reed............................................. 88
Additional Material Supplied for the Record
Prepared statement submitted by Mary Martha Fortney, President
and CEO, NASCUS................................................ 90
(iii)
HOUSING FINANCE REFORM: PROTECTING SMALL LENDER ACCESS TO THE SECONDARY
MORTGAGE MARKET
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TUESDAY, NOVEMBER 5, 2013
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order.
Today we discuss a housing finance reform issue that is a
top priority for many Members of this Committee, especially
those from rural States: small lender access to the secondary
mortgage market. While there is much to criticize about the
current housing market, one of its strengths is that we have a
national market for both single- and multi-family housing.
Because of the existence of Freddie, Fannie, and other
programs, the secondary market serves lenders of all sizes in
all areas, keeping credit accessible and affordable for
consumers across the country.
As we consider legislation to reform the housing finance
system, I cannot overstate how important it is that we get the
small lender access right. I applaud Senators Tester, Johanns,
Heitkamp, and others for focusing on this issue and making
progress on a solution. Senator Crapo and I also believe this
is a crucial element of any legislation, and we continue the
work to find the right path forward.
Today's witnesses will discuss their evolving thinking on
how to protect small lender access to the secondary mortgage
market and provide us with recommendations. They will also
discuss what parts of the current system must be preserved and
what parts can be improved in a new system.
Various proposals, including S.1217, suggest creating a
mutual organization, or a cooperative, to act as an entry point
for small lenders to the secondary market. We must think
carefully about how such an entity would operate and be
governed, as well as who should be its members, and construct
it so that small lenders can continue to access the secondary
market at a reasonable price and with ease. In addition, over
7,000 small financial institutions are members of the Federal
Home Loan Bank System. Thus, we may also want to consider
whether the Federal Home Loan Banks should play a larger role
assisting their members to access the secondary market, and
how.
Unlike many large lenders, most small lenders choose to
service the loans they make, which enables small lenders to
keep a connection to their consumers and their communities. As
we heard at last week's hearing, this is often better for
consumers, as many of the servicing problems we saw during the
crisis came from lenders who sold their servicing rights. Thus,
one of the essential tasks in building a new housing finance
system will be to preserve the ability of small lenders to
service their own loans.
If Congress passes housing finance reform without getting
small lender access right, it will be the homebuyers in rural
and underserved areas who pay the price for that mistake. For
all those families, each of the organizations represented here
today and we in Congress must work together to identify the
best options that will work.
With that, I will turn to Ranking Member Crapo for his
opening statement. Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you, Mr. Chairman. Today the Committee
will hear about how we can protect small lenders' access to the
secondary mortgage market. It is my understanding that key
issues for small lenders in a reformed housing finance system
are whether they will have adequate secondary market access
and, if so, how that access will be structured and at what
cost.
We have a broad panel of witnesses today, and I thank you
all for coming to testify on this critical issue. This issue is
important since small lenders represent the lifeblood of many
communities across America, and especially rural communities in
Idaho and elsewhere.
Lending used to be a community-based enterprise, relying on
local knowledge and expertise to extend credit. In many
community banks, credit unions and small lenders continue to
operate that way even today despite increased regulatory
burdens that often threaten this traditional model.
I mention regulatory burden on small lenders for a distinct
reason. Small entities are already disadvantaged in the
existing system. A recent Federal Reserve Bank of Dallas paper
found that small banks are spending 10 to 15 percent of their
net income on compliance costs. That same paper noted that a
bank with less than $300 million in assets has to hire a full-
time compliance officer because outsourcing compliance has
become too expensive.
These troublesome regulatory cost estimates clearly
indicate that a streamlining of regulatory requirements is
needed to ensure that small lenders remain competitive. One of
the ways to do this is to enable them to access the secondary
market in an efficient manner. The secondary market allows
lenders to make new loans by buying or pooling closed loans,
thus enabling even small companies to originate relatively
large volumes of loans.
Some small lenders prefer to sell loans and retain
servicing rights in order to generate ongoing income and foster
client relationships. Others prefer to sell loans to
aggregators who treat them fairly. Yet not every small lender
has the financial capacity or expertise to directly manage the
complexities of the secondary market.
The legislation introduced by my colleagues, S.1217, goes a
long way to address these issues and to provide affordable
secondary market access for small lenders. It does so by
providing two access points for small lenders: one through a
cooperative, the so-called Mutual; and another by allowing
Federal Home Loan Banks to securitize loans originated by their
members.
The Federal Home Loan Banks know their customers well and
are deeply involved in the local communities they serve. The
Mutual would also be structured to serve the needs of its
members: credit unions, community and midsized banks, and
nondepository mortgage originators who know their customers
through direct relationships. This approach has received
positive reaction from small lenders.
One of the goals of the housing finance reform that we
introduce should be to ensure that this new entity, the Mutual,
can serve the needs of small lenders without exposing taxpayers
to the unnecessary liability that we have seen in the past.
This can be done only if the Mutual enables its members to
access the secondary market without encouraging or requiring
actions that would distort the market in any way.
We need to think about how to structure the Mutual so that
its activities and the activities of its members result in a
strong underwriting standard that will essentially protect the
Mutual, its members, the communities they serve, and the
taxpayers.
In order to accomplish that, we must reach consensus on how
to structure the Mutual from an operational side, how to best
fund it, what criteria for membership are appropriate so that
the Mutual is adequately capitalized, and what safeguards are
appropriate to ensure effective risk management.
Today's hearing is a good platform for that discussion, and
I believe we can get on the same page regarding how to best
address these issues. And again I thank you, Mr. Chairman, for
holding this hearing.
Chairman Johnson. Thank you, Senator Crapo.
Are there any other Members who would like to give a brief
opening statement? Senator Tester.
STATEMENT OF SENATOR JON TESTER
Senator Tester. Yes, thank you, Mr. Chairman, and it is
brief because I am not going to be able to stick around for the
questions. I just want to thank you and Ranking Member Crapo
again for your commitment to have weekly hearings on housing
finance reform and be able to mark up a bill before the end of
the calendar year. I appreciate your leadership on this.
This issue is critically important to preserve access to
the secondary market for community-based institutions, and it
was a concern to me and Senator Johanns when we got on board
with S.1217. We worked to craft a mutual securitization company
framework and to enhance the role of Federal Home Loan Banks.
The goal with these mechanisms, which enable community-
based institutions to access the secondary market, is to
leverage economies of scale, to put smaller institutions on
equal footing with their large competitors. That way we can get
the pricing that--they can get the pricing and the execution
that they deserve based on high credit quality of the loans
that they underwrite.
Obviously Senator Johanns and I are committed to ensuring
that these provisions work, and I want to thank all the
stakeholders here today for their input and suggestions which
were integral in helping us draft this legislation and for all
their continued input on ways to further improve the bill as we
move forward.
The bottom line is that there is broad consensus from both
the sponsors of this legislation and the stakeholders about
ways that this legislation can be improved and, more
importantly, there is a shared commitment to ensure that
housing finance reform works for community-based institutions.
I know that many of the stakeholders here today have been
working together to drill down on these issues, and I am
confident that if we get the right folks together in the same
room, we can resolve any issues easily and quickly.
I look forward to working with the Chairman and Ranking
Member to tweak this legislation to ensure that it works for
community-based institutions, and I stand by ready to assist in
any way that I can so we can get this bill to the President's
desk sooner rather than later. Why? Because I believe we have a
limited window of opportunity here, and I am afraid that it
will get much more difficult if we fail to seize on that window
of opportunity.
Thank you, Mr. Chairman.
Chairman Johnson. Anybody else?
[No response.]
Chairman Johnson. I would like to remind my colleagues that
the record will be open for the next 7 days for additional
statements and other materials.
Our first witness is Mr. Richard Swanson, president and CEO
of the Federal Home Loan Bank of Des Moines, testifying on
behalf of the Council of Federal Home Loan Banks;
Mr. William A. Loving, Jr., president and CEO of Pendleton
Community Bank and chairman of the Independent Community
Bankers of America;
Mr. Bill Hampel, senior vice president and chief economist
at the Credit Union National Association;
Mr. Bill Cosgrove, president and CEO of Union Home Mortgage
Company and chairman-elect of the Mortgage Bankers Association;
Mr. John Harwell, associate vice president of risk
management at Apple Federal Credit Union, testifying on behalf
of the National Association of Federal Credit Unions;
Finally, we have Mr. Jeff Plagge, president and CEO of
Northwest Financial Corporation and chairman of the American
Bankers Association.
We welcome all of you here today and thank you for your
time.
Mr. Swanson, you may begin your testimony.
STATEMENT OF RICHARD SWANSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL HOME LOAN BANK OF DES MOINES, ON BEHALF OF THE
COUNCIL OF FEDERAL HOME LOAN BANKS
Mr. Swanson. Chairman Johnson, Ranking Member Crapo, and
Members of the Committee, I am Richard Swanson, president and
CEO of the Federal Home Loan Bank of Des Moines, a federally
chartered cooperative owned by nearly all of the 1,200
financial institutions in the States of Minnesota, Iowa,
Missouri, North Dakota, and South Dakota. I appreciate the
opportunity to speak to you today on behalf of the Council of
Federal Home Loan Banks.
More than 7,500 financial institutions of all sizes,
including commercial banks, savings banks, credit unions,
insurance companies, and CDFIs, are members of the Federal Home
Loan Banks. Most of them are active mortgage lenders who use
advances from their Federal Home Loan Bank to help fund loans
that could be held in their own portfolios, such as adjustable
rate mortgages.
With almost $500 billion of outstanding advances today,
providing collateralized funding to our members is our primary
business line and one that needs to be preserved.
Most lenders have difficulty managing the interest rate
risk associated with holding long-term fixed-rate loans on
their balance sheets. As a result, they typically sell those
loans into the secondary market where they are pooled into
large mortgage-backed securities. When selling their loans into
the secondary market, the smaller lenders face particular
challenges. This morning, I will focus on two of these
challenges and the role the Home Loan Banks play in helping
small lenders deal with them.
The first challenge for smaller lenders is one of volume.
How can a few loans from many lenders be efficiently gathered
and sold into the secondary market at pricing for the combined
volume that is competitive with the large lenders? Building
upon our longstanding business relationships with members, the
Home Loan Banks developed mortgage programs to help smaller
lenders meet this volume challenge.
We purchase mortgages in small volumes from over 1,600 of
our members at pricing comparable to what the large lenders
were getting from Fannie and Freddie. Initially we held all of
these loans as long-term investments. Now we are also
leveraging the scale of these mortgage programs to facilitate
the sale of mortgages by smaller lenders directly to secondary
market buyers, but at prices reflecting their collective
volume.
In the reformed secondary market contemplated by S.1217,
Fannie and Freddie will no longer dominate the aggregation,
pooling, and securitization functions. These functions will be
distributed among more parties, potentially including the Home
Loan Banks. By aggregating and pooling loans in sufficient
volumes for issuance in mortgage-backed securities, we could
further improve secondary market pricing for our smaller
members.
The second challenge for smaller lenders facing the
secondary market relates to value. Smaller lenders tend to
originate mortgages that perform better and are, therefore,
more valuable to investors. How do smaller lenders get paid for
this added quality? Our mortgage programs allow smaller lenders
to retain a portion of the credit risk of each mortgage they
sell to us. If their loans perform well, the members receive a
credit enhancement fee to reward them for the value of their
loans.
Over the past 15 years, the Home Loan Banks have purchased
more than $200 billion of mortgage loans with this risk
retention feature. With our members' skin in the game, these
loans have experienced total losses of less than 15 basis
points, or less than one-seventh of 1 percent of the original
principal amounts. This is an extraordinary result.
In the secondary market contemplated by S.1217, any pool of
mortgages securitized with the backstop Government guarantee
would require private capital insurance covering the first 10
percent of losses. If this private capital loss coverage is
provided in a competitive market by multiple parties, we could
seek bids for that coverage on pools of higher-value mortgages
originated by our members, which should command a lower
premium. Members might also elect to retain part of the risk on
mortgages they sell as they do under our portfolio mortgage
programs. We have the experience to manage such a skin-in-the-
game program which may enable us to negotiate an even better
price for their private capital guarantee or a credit
enhancement fee to members if their mortgages perform well.
We are pleased that S.1217 recognizes the importance of
lenders of all sizes in a reformed housing finance system and
contains specific provisions to assure competitive and reliable
secondary market access for smaller lenders. We also appreciate
that the bill provides different alternatives for the Home Loan
Banks to serve their members as the housing finance system
evolves. We stand ready to perform that mission.
Thank you.
Chairman Johnson. Thank you.
Mr. Loving, please proceed.
STATEMENT OF WILLIAM A. LOVING, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PENDLETON COMMUNITY BANK, FRANKLIN, WEST
VIRGINIA, AND CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF
AMERICA
Mr. Loving. Chairman Johnson, Ranking Member Crapo, and
Members of the Committee, my name is William A. Loving, Jr.,
and I am president and CEO of Pendleton Community Bank, a $260
million asset bank in Franklin, West Virginia. I am appearing
today as chairman of the Independent Community Bankers of
America, and thank you for convening this hearing. ICBA
sincerely appreciates the opportunity to work with the
Committee to craft housing finance reform legislation.
Community banks represent approximately 20 percent of the
mortgage market, and secondary market sales are a significant
line of business for us. Though Pendleton Community Bank holds
most of its mortgage loans in portfolio, in recent years we
have sold an increasing volume of loans into the secondary
market. We would sell more, but many rural properties are
disqualified because of the current underwriting and appraisal
guidelines of the GSEs.
Pendleton's secondary market sales are driven by customer
demand for 30-year fixed-rate loans. 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. As the housing market recovers, with more
flexibility, I expect we will continue to sell an increasing
number of loans. Secondary market access is critical even for a
portfolio lender such as Pendleton.
The current GSE secondary mortgage market structure has
worked well for community banks. It permits them to effectively
hedge interest rate risk and offer rate locks 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.
ICBA is grateful to Senators Warner, Corker, and all the
Committee cosponsors for introducing S.1217. ICBA sincerely
appreciates the opportunity to provide input into this bill. We
are encouraged by the inclusion of certain provisions to
address ICBA's concerns, including the Mutual Securitization
Corporation which would secure access to the secondary market
for community banks and allow them to sell loans on a single-
loan basis, be paid in cash, and retain the servicing rights.
However, the success of the Mutual depends on the details
and the implementation. My written statement contains more
detail. For now, I will focus on two recommendations we have
for improving the Mutual.
The first concern is its capitalization. The Mutual must be
well capitalized to provide competitive pricing of credit
enhancements and guarantees. However, because community banks
cannot provide the majority of the initial capitalization, ICBA
recommends using the profits of the current GSEs--or at least a
portion of them--to capitalize the Mutual, which could be
repaid over time through the Mutual's operational earnings.
Our second recommendation concerns eligible sellers to the
Mutual, a question that is critical to its viability,
competitiveness, and ability to provide liquidity for all
market participants. ICBA recommends all current approved GSE
sellers and servicers with assets up to $500 billion be
eligible to sell and service mortgages. While the Mutual is
targeted toward small and midsized lenders, some larger
institutions may prefer to sell loans for cash rather than
securitize them. Allowing more lenders to access the Mutual
will help build the scale needed to secure competitive terms
for third-party credit enhancements and improve liquidity for
all sellers. The 15-percent cap on securities guaranteed by the
FMIC will help limit concentration.
ICBA has additional recommendations for improving S.1217. A
particular concern is excessive complexity. A system that is
too complex and entails too much risk would force additional
market consolidation and shift yet more control to the largest
lenders and Wall Street firms. Equal and direct access to the
secondary market is a vital component for community banks. The
Mutual must have a specific duty to serve all markets,
including small towns and rural communities. Efforts to
restructure the housing finance system must protect this
critical portal for small financial institutions.
Thank you again for the opportunity to testify today. I
look forward to answering your questions.
Chairman Johnson. Thank you.
Mr. Hampel, you may proceed.
STATEMENT OF BILL HAMPEL, SENIOR VICE PRESIDENT AND CHIEF
ECONOMIST, CREDIT UNION NATIONAL ASSOCIATION
Mr. Hampel. Thank you. Chairman Johnson, Ranking Member
Crapo, Members of the Committee, I am Bill Hampel, chief
economist for the Credit Union National Association, the
largest credit union advocacy organization in the U.S. We
represent America's State and federally chartered credit unions
and their 97 million members.
Credit unions are now significant players in residential
mortgage lending, and my comments today reflect the views of
our credit unions and the needs of their members.
Qualifying credit union members need to be able to borrow
to finance their homes in a stable market with predictable
costs. For credit unions, so long as they produce one or more
eligible mortgages, they should be able to sell them to an
issuer of Government-backed securities, directly or through an
aggregator, at market prices, for cash, without low-volume
penalties, and with the option to retain servicing. We do not
have too long a list there. In addition, standardization of all
steps in the process is very important to credit unions.
CUNA believes that the general approach of S.1217 is well
thought out and sound public policy. However, we do have
several suggested improvements to the bill that will be
necessary for it to work for small lenders.
Regarding the operations of the Mutual Securitization
company, I have three suggestions.
First, it should be available to all lenders regardless of
size that do not themselves or through a subsidiary issue
covered securities. Restricting the Mutual to lenders with less
than $15 billion in assets would not allow for necessary scale
economies and could adversely affect the liquidity of
securities issued by the Mutual. In fact, it would be desirable
for the Mutual to be among the largest if not the largest
issuer of covered securities.
Second, the Mutual's governance should be as a cooperative,
with a board elected to represent all classes of membership,
elected by and from each group, by type and size of lender. The
basic mission of the Mutual, to provide unfettered access to
the secondary market for lenders of all sizes, should not be
subject to change.
Third, the Mutual should be allowed a small but limited
balance sheet--enough to pool mortgages before a sale into
securities and perhaps to hold some modified mortgages.
Regarding the private provision of the first 10 percent of
loss on covered securities, we have five suggestions.
First-loss coverage should only be available through bond
guarantors as opposed to securities structures. Bond guarantors
would be much more stable as sources of private capital than
senior subordinated deal structures across all phases of the
business cycle. In addition, securities structures are likely
to favor larger lenders.
Second, when financial markets are stressed, rather than
temporarily waiving the requirement for first-loss coverage,
the FMIC could sell such coverage to issuers at a price
determined by formula. Once markets calm down, FMIC could sell
that first-loss coverage to private bond guarantors. This would
allow the Government to mimic market functions when they are
not operating properly while providing for a quick return to
private participants once markets stabilize.
Third, the liability of the bond guarantor should be
limited to the first 10 percent of loss on each security or
perhaps a limited vintage of securities and not to the entire
book of business of the guarantor. Therefore, the payment of
some losses by FMIC out of its reserves need not be considered
a catastrophic event, especially considering that those
reserves will have been provided by private market
participants.
Fourth, the amount of capital reserves required of bond
guarantors should be sufficient to cover the first 10 percent
of loss on covered securities under conditions as severe as the
recent Great Recession. Since not all securities would suffer
10-percent losses in this scenario, this would require
substantially less than 10 percent of the total exposure of
each bond guarantor, and the adequacy of reserves should be
determined by FMIC.
And, finally, to avoid ``too big to fail'' problems with
large securities issuers, bond guarantors should be distinct
from any issuer of covered securities.
Regarding underwriting standards, the coexistence of
underwriting standards from both the Qualified Mortgage rule
and future secondary market requirements will be confusing and
problematic to credit unions and other lenders. This issue has
been temporarily dealt with by granting QM status to any loan
that qualifies for purchase by the enterprises. Before that
exemption expires, steps should be taken to combine
underwriting requirements to meet the needs of both, of
consumer protection and efficient operation of the secondary
market.
I have a couple of suggestions on additional provisions
specific to credit unions to add to S.1217.
First, we believe that credit unions may need additional
investment authority in order to capitalize their share of the
Mutual.
And, second, we encourage the Committee to include language
that would amend the Federal Credit Union Act to consider all
loans made on one- to four-family residential properties as
residential loans, as is currently the case for commercial
banks.
And, finally, one point not related to S.1217, largely due
to concerns with vendor readiness, a 1-year extension of
January's compliance deadlines for CFPB's new mortgage rules
would be optimal. Failing that, we urge Congress to encourage
more time before examiners begin to write up financial
institutions. Equally important, Congress should provide a
reasonable delay in the private rights to sue.
Thank you, and I look forward to your questions.
Chairman Johnson. Thank you.
Mr. Cosgrove, you may proceed.
STATEMENT OF BILL COSGROVE, CHIEF EXECUTIVE OFFICER, UNION HOME
MORTGAGE CORP., AND CHAIRMAN-ELECT, MORTGAGE BANKERS
ASSOCIATION
Mr. Cosgrove. Thank you. Chairman Johnson, Ranking Member
Crapo, and Members of the Committee, my name is Bill Cosgrove
and I am a certified mortgage banker. I have 28 years of
experience as a mortgage banking professional. I currently
serve as chief executive officer of Union Home Mortgage Corp.,
headquartered outside of Cleveland. I am also chairman-elect of
the Mortgage Bankers Association. My company was founded in
1970, and I purchased it in 1999. Our family owned business
employs 278 individuals, and we are very proud that since 1999
we have helped more than 50,000 homebuyers finance and
refinance homes and achieve their dreams of home ownership.
Small and midsized lenders play a crucial role in today's
housing finance system. Seventy-four hundred lenders originated
mortgages in 2012. Fannie Mae and Freddie Mac each report that
roughly 1,000 lenders are direct sellers to the GSEs, and
Ginnie Mae currently has more than 250 issuers. The vast
majority of these lenders are smaller independent mortgage
bankers and community banks. In fact, according to the most
recent HMDA data, independent mortgage bankers represent 11
percent of all lenders nationwide, yet they originate 40
percent of all purchase money mortgages in 2012. Over the
course of the next year, small lenders will become increasingly
important as we transition from a predominant refinance market
to a purchase market.
It is important to recognize that not all small lenders
have the same needs when it comes to accessing the capital
markets for mortgages. Lenders with the skills and the capital
should be in a position to make their own choices about how,
when, where, and to whom to sell their production, based on
their core competencies and other strategic objectives.
As policy makers consider both transitional and end-state
reforms, the future secondary market needs to provide direct
access, on competitive terms, for those lenders who can take
care of the requisite responsibilities. In particular, small
lenders need a secondary market system that delivers: (A) price
certainty that represents the risk of the underlying loan; (B)
execution for both servicing-retained and servicing-released
loans; (C) single-loan and/or small pool executions with a low
minimum pool size; (D) ease of delivery; and (E) quick funding.
Single-family lenders should be able to utilize familiar
credit enhancement options, such as mortgage insurance, to
facilitate secondary market transactions in a timely and
orderly way. Key functions present in today's secondary market
system should be preserved, while allowing new forms of private
credit enhancement to develop over time.
Congress should give serious consideration to expanding
Federal Home Loan Bank membership eligibility to include access
for nondepository mortgage lenders. These lenders are often
smaller, community-based mortgage bankers or servicers focused
on providing mainstream mortgage products to consumers.
S.1217 proposes a system that is closer in many aspects to
the Ginnie Mae model. Lenders are issuers and are responsible
for obtaining private credit enhancements before delivering
pools of loans to the central securitization platform for the
Government guarantee. This approach may work for some lenders,
but may be too operationally difficult for many small lenders.
S.1217 provides an alternative for smaller lenders in the form
of a mutual securitization company, a cooperative that takes
the role of the aggregator and issuer. S.1217 also provides for
the Federal Home Loan Bank System to be aggregators for smaller
lenders. Regardless, broad standards for a mutual should ensure
a fair governance process that does not advantage one class of
mutual shareholders over another.
It is equally important to ensure that the end-state
reforms address a variety of ways that small lenders access the
secondary market and that any mutual company created is not the
only option for small lenders.
Additionally, as Congress considers broader reforms to the
secondary market, care must be taken to ensure a smooth
transition and that switching costs to a new system does not
create major barriers to participation by smaller lenders.
Key GSE assets, including technology, systems, data, and
people, should be preserved and redeployed as part of any
transition associated with GSE reform. For example, certain
assets could be moved into the common securitization platform.
Other assets, such as automated underwriting systems, could
be made broadly available through a public leasing program or
auctioned with conditions that ensure access to all market
participants.
Making the secondary market work for smaller lenders is
critical for providing a competitive market, which ultimately
benefits homebuyers. We urge you to ensure that secondary
market reform provides smaller lenders with opportunities for
direct access.
Thank you again for this chance to continue the critical
dialog with the Members of this Committee.
Chairman Johnson. Thank you.
Mr. Harwell, please proceed.
STATEMENT OF JOHN HARWELL, ASSOCIATE VICE PRESIDENT OF RISK
MANAGEMENT, APPLE FEDERAL CREDIT UNION, FAIRFAX, VIRGINIA, ON
BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
Mr. Harwell. Good morning, Chairman Johnson, Ranking Member
Crapo, and Members of the Committee. My name is John Harwell,
and I am testifying today on behalf of NAFCU. I appreciate the
opportunity to share NAFCU's views on housing finance reform.
Key issues in the housing finance reform debate for credit
unions include: maintaining unfettered guaranteed access to the
secondary mortgage market; an explicit Government guarantee on
mortgage-backed securities; fair pricing and fee structures
that reward loan quality; ensuring market feasibility of a
mutual should such an entity be adopted; flexible underwriting
standards that will allow credit unions to best serve their
members; and adequate transition time to a new housing finance
model.
While credit unions hedge against interest rate risk in a
number of ways, selling products for securitization on the
secondary market remains a key component of safety and
soundness.
About a third of Apple Federal Credit Union loans are sold
on the secondary market to Freddie Mac. Apple has maintained
the servicing on those loans, as it is important to us to keep
that interaction with our members in any reform. NAFCU and its
member credit unions cannot support any approach that does not
maintain an explicit Government guarantee of payment of
principal and interest on MBS. The approach found in S.1217
where private capital stands in front of the guarantee offers a
viable public-private solution.
Fannie Mae and Freddie Mac play important roles for credit
unions. Key elements of the current system, such as the ease of
transaction and the standardization credit unions currently
experience when using software provided by Fannie and Freddie,
must be maintained. Furthermore, even though Apple is currently
not using it, the function of the cash window at the GSEs is
also vital to credit unions.
In the context of S.1217, NAFCU believes the establishment
of the FMIC Mutual Securitization company is a workable
solution to help guarantee secondary market access for credit
unions. While NAFCU believes that the proposed Mutual is a
viable option, we appreciate the sponsors' openness to
improving it.
NAFCU has concerns about the $15 billion cap for
participation in the Mutual and believes any cap should be
substantially higher. Standards for participation in the Mutual
should be set by its board of directors, which should be
elected by the membership and include at least one Federal
credit union representative. Since the Mutual would be the
guaranteed route to access the secondary market for small
lenders, especially in difficult times, it is important that
there be a streamlined process to become a member.
NAFCU believes that the fee structures associated with the
Mutual, whether it is to capitalize or to sustain it over time,
should be based on loan quality as opposed to the volume of
loans an entity generates. Congress should consider the Mutual
having some type of Government seed money that will help the
Mutual get off the ground and encourage qualifying entities to
participate from day one. Such funds could be paid back over a
period of years from the profits of the Mutual.
NAFCU could support the Federal Home Loan Banks being one
option for credit union access to the secondary mortgage market
as proposed in S.1217. However, this cannot be the only
mechanism in place for credit unions to gain access. Having
multiple options will allow credit unions to choose the avenue
that works best for them and help ensure healthy competition
for their loans, which can help with fair pricing.
Should Congress act to reform the Nation's housing finance
system, getting the transition right will be critical. My
written testimony contains additional thoughts on this process.
Finally, NAFCU maintains concerns about the Qualified
Mortgage standard included in S.1217 for loans to be eligible
for the Government guarantee. Underwriting standards may be
best left to the new regulator and should not be established in
statute. Doing so would allow the regulator to address varying
market conditions and act in a countercyclical manner if
needed.
Credit unions make good loans that work for their members
that do not all fit into the parameters of the QM box. Using
the CFPB QM standard for the guarantee would discourage the
making of non-QM loans. My written testimony outlines
additional concerns with the QM standard.
In conclusion, NAFCU appreciates the Banking Committee's
bipartisan approach to housing finance reform. In any reform,
it is vital that credit unions continue to have guaranteed
access to the secondary market and get fair pricing based on
the quality of their loans and that the Government continues to
provide a guarantee to help stabilize the market.
Thank you for the opportunity to provide our input on this
important issue. I would welcome any questions that you may
have.
Chairman Johnson. Thank you.
Mr. Plagge, you may proceed.
STATEMENT OF JEFF PLAGGE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NORTHWEST FINANCIAL CORPORATION, ARNOLDS PARK, IOWA,
AND CHAIRMAN, AMERICAN BANKERS ASSOCIATION
Mr. Plagge. Good morning, Chairman Johnson, Ranking Member
Crapo, and Members of the Committee. My name is Jeff Plagge. I
am president and CEO of Northwest Financial Corporation of
Arnolds Park, Iowa, and chairman of the American Bankers
Association. Northwest Financial Corp. is a privately owned
banking organization. We have two banks with approximately $1.6
billion in assets. We make between 3,000 and 3,500 mortgage
loans a year in our markets, and with the exception of Des
Moines, Iowa, and Omaha, Nebraska, they are all rural markets.
The majority of these loans are sold into the secondary
market, but we also portfolio loans, especially in some of our
more rural markets due to loan size or some of the other issues
that make it difficult to work in the secondary market.
Mortgages are a big part of our business model, and any changes
affecting mortgage lending are very important to us, our
customers, and our communities.
We commend the Committee for its focus on these issues, and
particularly Senators Corker and Warner and the cosponsors of
S.1217, in establishing a framework to build on. ABA agrees
with the sponsors of S.1217 that a secondary market Government
guarantee is important and particularly to low- and moderate-
income housing borrowers. That guarantee must be explicit,
fully priced into the cost of each mortgage, and, most
importantly, available to all eligible primary market lenders,
regardless of their size, charter type, geographic location, or
number of loans sold into the secondary market. Community banks
must remain able to access that guarantee. If community banks'
access is curtailed or denied or their pricing in the market is
inequitable, they and the communities they serve will suffer.
As important as this Federal Government support is, going
forward it should be within a mortgage market predominantly
filled by the private sector. Fostering a private market for
the majority of housing finance must be part of any Federal
policy and should be balanced with Government support for
certain segments of that market.
We believe that a mutual organization--if structured in an
economically viable way and with appropriate governance--may be
a promising approach to the secondary market liquidity. It must
be structured to ensure equitable access for all members,
regardless of size or charter. This would require a governance
structure that balances the rights and needs of all members.
The Federal Home Loan Bank System can serve as a model for
such governance as it is cooperatively owned but its governance
rules provide the necessary balance for all members.
Whatever structure is adopted, it must include the ability
to sell loans individually or in small numbers for cash. This
cash window is essential for small lenders. My bank sells loans
via the cash window, and it is hard to have sufficient volume
to execute our own mortgage-backed securities, and the interest
rate risk and pipeline management would be too difficult.
Sellers must also be able to retain servicing or sell it.
Our larger bank does retain servicing rights on many loans, and
we now service approximately $587 million of Freddie Mac loans.
Our customers always prefer that we service their mortgages,
but capital limitations affect how much we can hold in mortgage
servicing rights.
We believe that any reform of the secondary market must
recognize the vital role played by the Federal Home Loan Banks.
We do believe that an enhanced role for the Federal Home Loan
Banks holds promise. Just like the Mutual structure, finding
the necessary capital to support additional activities will be
the challenge, and there will be new risks that would require
appropriate oversight.
A more limited expansion of the Federal Home Loan Banks may
be feasible, such as expanding aggregation of mortgages for
security issuers and potentially the issuing of securities by
Federal home loans banks. Whatever changes are made, Congress
must not harm access to traditional advances for all banks and
particularly community banks.
Reforming the mortgage markets will be a complex
undertaking with far-reaching consequences for our economy. It
must be undertaken in a thoughtful, orderly manner and done
with careful transition over a number of years to ensure that
the mortgage markets are not destabilized.
As you consider these changes from the perspective of
community banks, the key requirements are equal access, equal
pricing, multiple channels, and reasonable capital
requirements. We are committed to work with the Committee to
achieve a sustainable, durable, and equitable system.
Thank you very much.
Chairman Johnson. Thank you. Thank you all for your
testimony.
As we begin questions, I will ask the clerk to put 5
minutes on the clock for each Member.
Each of you highlighted the importance of preserving the
cash window underwriting systems and servicing rights as well
as creating a well-structured mutual organization.
Understanding your are all still working on recommendations on
these complicated issues that you will send us, how important
is it to your organizations' members and their customers that
we get it right? Mr. Hampel, let us start with you, briefly.
Mr. Hampel. Thank you, Chairman Johnson. It is absolutely
essential. Credit unions do not always sell all their loans.
They often will hold onto a significant portion of them.
However, as others have testified, there are times when we have
to sell loans, and for our members to have access to loans that
are funded by the secondary market the way all other loans are,
it is absolutely crucial that this be done right.
The previous system did not work. It broke on us and
created big problems. However, there are pieces of that
previous system that we need to maintain and bring into the new
system, fixing the design flaws.
Chairman Johnson. Mr. Cosgrove, do you agree with Mr.
Hampel?
Mr. Cosgrove. Absolutely, Chairman. There is no doubt that
the old system at times with G-fees based on volume versus the
actual risk of the credit picked winners and losers, and a lot
of times the small lender would be the loser in that scenario.
So it is absolutely critical, yes.
Chairman Johnson. Mr. Loving, do you agree?
Mr. Loving. Yes, I do. I think it is essential that we get
this right and that we protect the ability to sell loans on a
single basis, retain the ability to service rural areas in
America, and particularly some of the underwriting guidelines
and appraisal standards today prohibit the sale of loans from
rural America. So I think it is critical that this is processed
deliberately and that the end result is correct.
Chairman Johnson. Mr. Plagge, do you agree?
Mr. Plagge. I do as well. You know, when you think about
all the intersecting risks that are going on right now with
mortgage reform and Basel III capital requirements, QE, maybe
the unwinding of QE, there are a lot of things going on, and we
need to really work hard. And I commend the Committee for all
the work they have done already. It is quite interesting, the
unanimity between the discussions here with the Committee
Members. And so I think we have a ways to go. We have a lot of
decisions to make, and I think the transition timing is going
to be the critical part of it, that we do not go too far
without making sure the system is working.
Chairman Johnson. Mr. Harwell, do you agree?
Mr. Harwell. Yes, sir, I do. We would also like to ask that
there would be some kind of overlap in the structure if and
when the new system comes online so that there is no disruptive
forces in the market.
Chairman Johnson. Mr. Swanson, S.1217 creates a Mutual and
authorizes the Home Loan Banks to apply to be an issuer. Before
the old system is shut down, what targets would need to be hit
during a transition to verify that the Mutual and the home loan
bank issuer can coexist while providing equal access to the
smallest lenders?
Mr. Swanson. Thank you, Chairman Johnson. The outlines in
S.1217 of a Mutual provide an interesting start, but it is hard
for us to answer in detail the question of how a transition
would work.
As far as the Federal Home Loan Banks are concerned, we are
suggesting that we can build on the experience that we have had
in our existing programs to expand our role in providing access
to members. The programs that we have, have grown organically
over the last 15 years. We have learned lessons along the way,
and they have evolved in response to the needs that our members
have expressed through the voice of their directors of our
cooperatives.
We think it is important for smaller lenders to have
alternatives. We do not see the Federal Home Loan Banks as
being the sole point of access by any means.
So as we look to the future, it is important for us to
respond to the voices of our members, and I think it is
significant, without rehashing the testimony that the six of us
have given this morning, that five others who represent our
members are very much in agreement with what they want from the
Federal Home Loan Bank, and it would be our obligation to serve
that interest.
Chairman Johnson. Mr. Loving, is the system in S.1217 more
complex than the current system? And what are the impacts of a
highly complex system on small lenders?
Mr. Loving. Thank you. I would not say that the elements of
S.1217 are more complex or less complex than the current
system, but I will tell you that any system that is complex
creates problems for smaller community-based financial
institutions, community banks. In dealing with the underwriting
requirements, the appraisal guidelines that are in place today,
it does--it prohibits access to the market. So I think any
future model needs to be simple. It needs to be designed so
that any community bank of any size can process mortgages, can
present their loans for cash, and participate in the process.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
My first question really is more of a request. Each of our
witnesses today represents small lenders in some capacity, even
though your membership is very diverse. And given the fact that
we are working very hard to try to get a markup ready for
action here in the Committee in the near-term future and each
of you has somewhat different perspectives on how we should
establish it and put it together, I am just going to ask you if
you will all agree to work with us and, in fact, to work
together to come up with a sensible, mutually agreeable
solution for how to best structure the small lenders' access to
the secondary market using the basis that we are working from
here and essentially help this Committee get to a work product
as fast as you can. Does anybody have any problem with agreeing
to work together to get that done for us? I did not think so.
But I do make that request because we really do need your
assistance as we approach these importance structural decisions
that we are making.
My next question is to Mr. Loving and Mr. Plagge. Your
organizations represent banks, including small and community
banks, and with respect to how the Mutual should be structured,
it would be beneficial to know what would entice your members
to fully participate and take advantage of this new co-op that
is proposed in Senate bill 1217. Could you just quickly each
give me an answer on that?
Mr. Loving. Certainly. I think the structure is important,
and representation is equally as important. As the Mutual is
designed, I think, representation of community banks, such as
the Community Bank Council that is in existence in other
agencies, as well as governance of the Mutual is important so
that there is a voice of community banks in the formation and
the operation of the Mutual itself. Of course, obviously price
and ease of access is just as important.
Senator Crapo. Thank you.
Mr. Plagge.
Mr. Plagge. Along with those things, you know, we are
probably more of a proponent of more of a wide open Mutual
membership from all sizes, and it really goes down to the
capital equation to make sure that we do not limit ourselves or
limit the scale and opportunities of that Mutual. And so rather
than just create a Mutual for small banks only, open it up
further and let others become part of that, and that way we
think we assure the capital structure better in the long run.
Senator Crapo. Just quickly to both of you, and I mean very
quickly, should the Mutual's membership criteria be capped at a
certain threshold? And if so, what kind of threshold should we
look at? Mr. Loving.
Mr. Loving. I am not sure it should be capped at a
threshold. I think the more participants in the Mutual provides
capitalization in the scale that is needed for the efficiency
of both operation and price.
Senator Crapo. Thank you.
Mr. Plagge.
Mr. Plagge. I would agree with that, and to me that becomes
the Government's model, make sure that all voices are heard and
everybody has a voice. Again, the Federal Home Loan Bank has a
pretty solid governance model that could be copied.
Senator Crapo. All right. Thank you.
Mr. Hampel and Mr. Harwell, I want to go to you next, the
credit unions, and basically ask the same question. What do we
need to assure that we generate the interest and support of the
credit unions in moving into this new model?
Mr. Harwell. Credit unions will have to be able to afford
to get into it to generate enough loans to make the Mutual
work, you know, with our other colleagues. So we think that is
the biggest issue for us.
Senator Crapo. Thank you.
Mr. Hampel.
Mr. Hampel. Senator, I believe what credit unions would
hope for is that the Mutual be substantial enough to serve
their needs and that it would be stable enough for them to be
able to count on it for the long run with a standardized set of
processes that they can always go to regardless of the amount
of volume that they are bringing.
Senator Crapo. Thank you. And, again, to both of you, the
same question that I asked before about the cap. The question
is: Should membership criteria be capped at any threshold?
Mr. Hampel. We do not believe it should be capped. We do
think that it would be useful to define membership by function
and that any entity that is also issuing covered securities
would not also be able to use the Mutual. And it is because of
that, because the Mutual could get large as a result of this,
that it should be restricted to being a securitization utility
and not also provide the guarantee.
Mr. Harwell. We agree
Senator Crapo. You agree? All right. Thank you.
Now, Mr. Swanson, with regard to the Federal Home Loan
Banks, you have a good experience and a very low level of
credit losses because of the high-quality loans that you
originate. What specific requirements are in place to ensure in
your system that mortgages underwritten by your members are
sound? And what lessons should we draw from that as we put
together this legislation?
Mr. Swanson. Our mortgage programs have focused on the
conforming mortgage part of the market, so underwriting
guidelines have generally followed the Fannie and Freddie
guidelines.
What we have done in our portfolio programs where we
purchased mortgages from our members is we have had this skin-
in-the-game feature that I mentioned earlier. There are a
couple of different versions of it, but essentially it involves
the member retaining some portion of credit risk between 1.5 or
2 percent and 4 percent, depending on the original loan, and
then receiving a credit enhancement fee back if the mortgage
performs properly.
To the extent that loans need to find a place in the
secondary market that do not meet rigid requirements and are
not easily guaranteed, that kind of structure may provide a
model where you could have a skin-in-the-game option for
secondary market loans from small lenders that do not fit a
very narrow underwriting box.
Senator Crapo. Thank you.
And, Mr. Cosgrove, I am not leaving you out. I have run out
of time, so I will submit a question to you, if you do not
mind, later.
Mr. Cosgrove. Sure.
Chairman Johnson. Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and thank you and
Ranking Member Crapo for all the good work you are doing.
I wanted to actually press a little bit even harder than my
friend Senator Crapo. For those of us who have been working
over a year on S.1217, we appreciate some of your general
comments, but also recognize there are lots of ways to improve
this bill. I guess what I would urge is that, working with
Committee staff, you will agree, within a very, very short
period of time, whatever Committee staff thinks is appropriate,
that you actually get your specific comments, if we are going
to move this legislation, in a timely manner. Without those
specific comments, language comments, we are not going to get
there.
I guess I would ask, does anyone feel that if we do not
move quickly that this window of GSE reform may close on us?
Does anyone feel that the current system is sustainable?
Mr. Hampel. Go for it.
Senator Warner. Great. So I would take that as--I hope that
will be days or weeks in terms of getting your comments in
specific language, because, you know, we have been back and
forth on lots and lots of these iterations for some time now,
and without language, without specific language, we are not
going to get there.
Mr. Hampel, one of the things that--and I also want to
acknowledge Mr. Harwell as well from Virginia. I am glad we
have all got our ``We voted today'' signs on. Mr. Hampel, one
of the things that we have thought a lot about is trying to get
this transition right. And you have not--you know, we have
clearly tried to make sure that those existing Fannie and
Freddie securities do not get orphaned in this transition
period. And you suggested, I believe, in your written testimony
a phased-in approach that would allow the new security to be
blended with existing Fannie and Freddie credits that are out
there, to make sure that we do this continuity. Do you have any
other specific comment on that? It is an interesting idea, and
I have not really thought----
Mr. Hampel. Yes, what we had in mind is that--well, much of
the functions that are now performed by Freddie and Fannie
should end up, some of them being with the Federal Mortgage
Insurance Corporation and some of them with the Mutual, the
issuer--the two functions being split, the guarantor and the
issuer. And in the process--in a perfect world, when this is
all said and done, when we have flipped the switch, no one will
really notice anything happening that day because it happened
gradually through time. And so as much as possible, if certain
functions are going to be transferred from the old entities to
the new entities, that it be done in as seamless a way as
possible. And in terms of the securities, it would just mean
that if the securities from--the FMIC-backed securities are
going to end up being somewhat different from the current
structure of Freddie and Fannie, that those Freddie and Fannie
structures be changed along the way so that, again, there is as
seamless as possible a transition.
Senator Warner. You actually have a blending of kind of a
mix----
Mr. Hampel. Yes.
Senator Warner. ----of the securities together so there
would be that transition. I would love to see more comments on
that.
Mr. Swanson, I guess one of the things I am very interested
in trying to work through the role, the very important role
that the Federal Home Loan Banks play in what we hope would be
this new system, we hope they would play an important role, as
an aggregator or potential issuer, how would you make sure--you
know, since you represent--do a great job, but on a geographic
area that we get the appropriate geographic diversity when you
in a sense see the home loan bank boards issuing together and
then coming through a single platform, putting their product
then through the Mutual, do you want to talk about that on
geographic diversity?
Mr. Swanson. It is a great question. There are 12 Federal
Home Loan Banks. We are each independent. That is one of the
strengths, but it is also one of the challenges when you are
trying to address a national problem.
Today we have one type of program that now 10 banks are
either offering or they are in the final stages of getting
approval to offer. That is the MPF program. It is operated
through a common provider at the Chicago bank, but the actual
business activity is done by each of the participants in that
program. Two other banks operate a slightly different program
called the MPP program, so we anticipate by the first part of
2014 that all banks will be offering some form of mortgage
program in their areas.
Senator Warner. But then if they do this, we would have to
still figure out a way for your role so that if this basket of
securities would not just be limited to a certain--one
particular geographic region.
Mr. Swanson. Yes, and we do not necessarily envision
ourselves being an issuer of securities. It is a possibility
depending on how the overall market evolves. But I think it is
likely that if our business expands, each bank may operate--may
handle its own balance sheet, and then have a centralized
process where we would handle the aggregation and pooling to
get economies of scale.
It is also possible--and we have been in contact with the
staff about some technical corrections in S.1217--that we would
form through multiple banks or all of the banks together some
form of subsidiary to do this.
Senator Warner. My time has run out, Mr. Chairman, but I
just--and I will not ask for any response, but I would like to
hear from all of you--you know, there is a tension here as we
think about transferring some of the assets from Fannie and
Freddie over to a Mutual, you want them all transferred as
cheaply as possible. We also have to look in terms of
protecting the rights of the taxpayer. But if you can give us
some more specific comments on that, that would be helpful.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Corker.
Senator Corker. Mr. Chairman, thank you, and thanks again
for having these weekly hearings, and thanks to all the
witnesses. I know you have not only participated today, but I
know you have been participating with the Banking staff and
with all of us who are concerned about getting a new housing
finance system.
Let me just sort of get some general themes, if I could. If
I understand correctly, all six of you like the idea of a
Mutual being created, and, you know, the issue of how it is
capitalized, I think we all understand, since it is not taking
risk, we are not talking about something that has to have a
large amount of capital. It is basically just working capital,
as I understand it.
The notion or the figuring out of how we get that small
amount of capital into the Mutual in advance is an issue that
certainly like minds can figure out a way of doing. So it is an
issue we need--it is a detail we need to figure out, but you
all do not see that as something that is very difficult to do.
Do you all agree?
Mr. Hampel. Right, yes.
Senator Corker. So the body language is all in
acknowledgment.
The G-fees for volume, another interesting prospect of
S.1217 is that we move away from volume-priced G-fees and
instead it is on a per loan basis, and if I understand the
testimony and the private meetings we have had, all of you
think that construct of having G-fees based on a per loan basis
versus volume is also a concept that is a good one. Is that
correct?
Mr. Hampel. Correct.
Mr. Cosgrove. Yes.
Senator Corker. And then a third concept would be
separating the common securitization platform from the risk
sharing. Right now, let us face it, Fannie and Freddie own
those, if you will, and it does make them, if you will, no
question, too large to fail, because if they failed you would
not have that common securitization platform. So the notion of
separating the risk taking from the common securitization
platform is also an idea that all six of you seem to embrace.
Is that correct?
Mr. Loving. Correct.
Mr. Cosgrove. Yes.
Senator Corker. OK. So it seems to me that--I know there
are some details that all of us need to work together to get to
a good end, but it seems to me on the big ideas we are there.
And I know there are some questions about, you know, who should
be a part of the Mutual and how the voting should take place.
And, again, it seems like to me those are important details,
especially from your perspective. But they are things that we
can figure out.
The transition, I agree, we need to add some meat to that,
although I think giving the FMIC Director and others a little
bit of leeway probably makes some sense, too. You want some
degree of judgment. You do not want us laying it out so
ironclad that there is not some degree of flexibility, but we
need to add some detail there. Is that correct?
Mr. Loving. Correct.
Mr. Cosgrove. Yes.
Senator Corker. OK. I noticed all six. So here is what I
would ask. I noticed that there is--look, you know, I used to
borrow a lot of money myself and, you know, in the beginning
borrowed everything. And I realized that with, you know, no
equity down, you can really make an infinite return on your
investment. And I realized there is always, you know, a desire
to water things down and make it easier to deal with these
entities.
There are a couple of issues I would like to question. One
is QM. I noticed that some of you have some concerns about QM
being the standard, and I guess from our side, the concern we
have is setting up an entity, and all of a sudden, the
standards get so watered down that we end up creating a
catastrophe.
Mr. Hampel, if you could, talk with me a little bit about
it. I know 1217 now contemplates QM plus 5-percent downpayment.
I know there have been some concerns about that being too
rigid, not from the panel but from the witnesses, and I wonder
if you might address that from your perspective.
Mr. Hampel. Thank you, Senator. The problem with any
specific set of criteria as in the QM standard is that
assessing whether or not an individual loan application is a
good loan or not depends on so many different factors that it
is hard to write a standard that draws bright lines for each of
those factors. And so a 43-percent debt-to-income ratio in most
cases is really a reasonable standard. But there can be cases
when other factors will make that no longer necessary.
The other thing is that coming as we do after the worst
financial crisis in the last 80 years, it is understandable
that the rules that people would think are appropriate now are
probably a little bit stricter than they really should be, just
because we are recovering from such a crisis. And we fully
understand how we do not want to set up something where the
standards can deteriorate so that 20 or 30 years from now we
are back to where we were.
But, on the other hand, setting in place strict criteria
with bright lines on various of the many subcategories of
making a loan could have the effect of excluding a lot of
otherwise qualified buyers from mortgages, and probably more of
the excluded people will be on the lower end of the income
distribution, which is probably not a good thing.
Senator Corker. Mr. Chairman, I see that my time is up. I
would like to talk with you all a little bit more deeply about
how we go about that. You know, those of us who care about the
taxpayers, which is all of us, I think, we do not want this
thing watered down and Congress playing in this thing again and
getting us in trouble. At the same time, I think some of the
points you are making are good, and you never ask a witness a
question that you do not know the answer to, and so I am not
going to do that publicly, Mr. Hampel. But I do want to follow
up a little bit on your countercyclical idea. I know the way it
is right now we let the capital standard fluctuate downward if
there is a disruption in the marketplace. I know you have
contemplated something else.
By the way, I like all of your testimony. I just had time
for one witness. But I do look forward to following up with you
on both of those, and all of you, with your relative concerns.
I appreciate the way you have worked with us. Obviously the
Home Loan Banks have played a great role right now in housing,
and I know we add some responsibilities, and we look forward
again to working with all of you as we move ahead.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. I appreciate the
comments of Senator Corker. Thanks to all six of you for
testifying today. You all raise important questions about what
structure might work. Your testimony, unfortunately, also
illustrates the complexity of this and how this is going to be
no easy--there are going to be no easy answers.
I appreciate the Chairman's question and your response
about the importance of getting this right and the importance
of moving not too quickly to get it right. I think that is
particularly important.
Let me just ask one question. I will start with Mr.
Cosgrove as a fellow Clevelander, but I would like this answer
from all of you. The mortgage market, as we know, is fairly
concentrated in both origination and servicing. The five
largest servicers service more than half of all mortgages; the
two largest originators make up more than 40 percent of all new
loans.
Mr. Cosgrove, and then each of you starting, if you would,
from left to right, what does this mean for small institutions?
You said you have some 200 employees in Strongsville and
elsewhere?
Mr. Cosgrove. Right.
Senator Brown. If you would start and just give me your
thoughts on what this means for relatively small institutions
like yours.
Mr. Cosgrove. Well, Senator, it is highly--this issue is
highly important for small lenders. We all know the old system.
Although there are many good parts of the old system, the old
system also exasperated--the differences in G-fees was a major
point in that, and what happened over time is smaller lenders,
if you do not have transparency in a system, if you do not have
parity in the price of the risk, if you do not have parity in
that area over time, the concentration gets to the top of the
market. And at the end of the day, companies like mine need to
have the ability to compete on what is right, and what is right
is measuring the price of the risk of the loans. And if you do
a good job with your customers and they have the ability to
repay and you are doing the right thing, you should be rewarded
for that. And I think the system today that is being
contemplated answers a lot of those questions moving forward,
and we are excited about that. We are also excited about, in
1217, when they talk about the Mutual, you talk about us
potentially having access to the Federal Home Loan Bank System,
we need multiple single-loan cash window, we need multiple--
small lenders, multiple options to execute our loans. And if we
have those options, we are going to have the ability to
compete, the ability to give our consumers very good pricing,
which is good for competition and good for the marketplace, and
gives us the ability to compete nationwide. So we are excited
about that.
Senator Brown. Mr. Swanson, any comments? If you have
something to add, any of you. Thank you, Mr. Cosgrove.
Mr. Swanson. I would make two quick comments. The Federal
Home Loan Bank of Des Moines serves a part of the country that
is largely rural, agricultural, small towns. The importance of
smaller lenders, community banks and other lenders, in serving
that market is absolutely essential. It would not be served
otherwise.
The other point I would like to make is that large lenders
tend to commoditize their business, commoditize their
mortgages, so that there is less flexibility in underwriting
the needs of the kind of customers that Bill and others on the
panel have talked about. Having a system where small lenders
can really underwrite the specifics of a particular borrower
and a particular home or property is absolutely critical.
Senator Brown. Mr. Loving, before you answer this, I want
to ask you another question so I can get one more question in,
if I could. There are two ways to level the playing field,
obviously, for small institutions: either help them pool their
resources or set some--so they have some same scale as
megabanks perhaps, sort of limit the scale and scope of the
largest banks. You talked about a 15-percent limit on a single
securitizer. So answer that, if you would, as we go down the--
--
Mr. Loving. Well, again, I think it is important that we
have volume so that there is a scale of efficiency and pricing.
But the fear would be that if the opportunity was there without
a cap, there may be a concentration in the market that you were
just speaking about in your previous question on the servicing
side.
So we think it is important that there be an opportunity to
participate, but yet at the same time, we want to cap that
level of participation so that there is somewhat of an equal or
level playing field in the ownership.
Senator Brown. Thank you.
Mr. Hampel.
Mr. Hampel. We think if you provide smaller lenders the
opportunity to pool their resources to create a utility large
enough to meet their needs, then it would not really be
necessary to restrict the size of any other players.
Senator Brown. OK. Mr. Harwell.
Mr. Harwell. We think small lenders need guaranteed access
and fair pricing based on quality because we do not have the
ability of the large lenders to securitize and get volume
pricing.
Senator Brown. OK. Mr. Plagge.
Mr. Plagge. A lot of it has been covered. I think the other
thing that we want to make sure we cover in this transition is
just the operational size of making mortgages. There is a lot
of change going on with mortgage reform today, and systems will
really matter. There are some great systems out there being
used today, and we want to make sure those systems are
available to lenders of all sizes to make sure we do not have
that disruption even at the lenders' desks themselves. And
access pricing and all the things that have been mentioned are
very critical. In some markets that we serve, we are the
mortgage lender. And so if we are not there, that market gets
underserved pretty quick.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman, and thank you to
Mr. Swanson, who does great work in my home State of North
Dakota, which tends to be extraordinarily rural, and
participates in helping us capitalize and provide access to
home ownership in our State.
I want to just tell you I have a particular interest in
this, which is making sure small institutions are able to
participate in mortgage lending to begin with before you can
even get into the secondary mortgage market. So I want to just
kind of put that on the table as well.
You have heard a lot of kind of back-and-forth here, I
think, on the panel with the Senators on what is the
appropriate timing, what do we see, and I think it is really
quite remarkable that you are all coming with about the same
level of suggestions. And it is, I think a tribute to the great
work that has been done by Senator Corker and Senator Warner in
vetting this process to begin with, and I think the work that
the Chairman and the Ranking Member have done to bring folks
together over a period of time.
And so where I think we can all agree, it is critically
important that we get this right. I think that the changes that
we want to make are important, but not insurmountable, and so I
am just--you know, I always hate to nail timeframes down, but
do you think this is a year's worth of discussion, 2 weeks'
worth of discussion, 2 months' worth of discussion, to
basically address the concerns that you have raised today? And
I would ask anyone on the panel to answer.
Mr. Loving. I am not sure if you can define it as a
specific time line, whether it be months or weeks or a year.
But I think it is critical that the process that is taking
place today and that has taken place, I think it is critical
that the end result in the perfect result, that it fits all the
markets.
[Laughter.]
Mr. Loving. And I know that is a big ask, but I think it is
important that it be processed and it is done correctly at the
end.
Mr. Plagge. I might just add I would agree with the urgency
side that Senator Warner talked about as well. We have an
entities today that are in conservatorship, no capital, no
ability to raise capital. So there is a time element to that
that I think needs to be pressed. And I just so appreciate the
Committee's open discussion on this because it is going to be
some back-and-forth and some testing and flexibility along the
way, but I think we can get to the right solution, and sooner
probably rather than later.
Senator Heitkamp. Within a reasonable period.
Mr. Plagge. Right.
Mr. Swanson. Senator Heitkamp, I have to tell you I am torn
between two feelings. One is I very much agree that this is a
window and prompt action is really important. I think it is
important to give some certainty about the direction that this
is going to head. But I can also tell you, it is complicated. I
think all of us are engaged in much deeper conversations
outside of this room today than we were a month ago. And I
think those conversations do need to continue as we build out
the details. It will also take some time to transition once a
decision is made from the system we have to a new system, and
that is really important to think about.
Mr. Cosgrove. Senator, I see this almost as two wheels
spinning. You have the wheel spinning of the legislation from
this body that we have come a long way and is well thought out
and I think is moving at a very good, reasonable pace. And then
you have the other spinning wheel of the reality of being a
market participant and creating the capital markets, obviously,
and making sure that there is a smooth transition to the
funding mechanisms and making sure there is no disruption to
the real estate industry, to our consumers, understanding where
the housing recovery is at today.
So I almost see this as two spinning wheels, both
legislatively and the realities of the capital markets and
serving customers, along with the other items that are being
dealt with in the marketplace like QM that is about to take off
in January and other things like that.
So I think we are going at a very reasonable pace right
now, and I think it is a good thing where we are headed.
Mr. Harwell. We think it is important to get it right more
than it is to do it fast, although we do believe that we are
getting close on agreement.
Senator Heitkamp. OK. And I have a couple other questions I
will submit for the record, but I think it is important to
understand that there is a level of frustration among a lot of
folks out there that we continue to talk about reform, but we
never do reform. We somehow never seem to get it done because
we hesitate. And I think if you look at transition rules and
the ability to adjust during a transition period, I think that
is a critical component. And to the extent that you can provide
input on that transition so that we have safeguards at various
points along the way, I think that would be very helpful.
But I will tell you that this is a town that does not move
very fast and they do not respond to crisis very well, and, you
know, I can only imagine if this was the Congress that has to
fight World War II where we would be.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman, Ranking Member
Crapo. I think it is clear we all agree that small lenders need
access to the secondary markets so they can write more
mortgages and they can get funding that they need through
advances from the Federal Home Loan Banks. And those advances
play a critical role in promoting home ownership, particularly,
I think a recent study showed, in rural areas.
I think it is also clear that the market believes that the
obligations of the Federal Home Loan Banks are implicitly
guaranteed by the Government, which is part of how these banks
can raise funds at very low rates and then lend those funds at
below-market rates.
Now, that may work if the funds are going to support
hospital in an underserved area like inner cities or in rural
communities, but not every home loan bank advance goes to
support home ownership, and every dollar that is used for
another purpose is a dollar that is not available to finance
the purchase of homes.
One example of that is the multi-billion-dollar loan that
Mr. Swanson's institution, the Home Loan Bank of Des Moines,
has extended to a Sallie Mae subsidiary at an interest rate of
about one-third of 1 percent.
Now, as you all know, Sallie Mae is a private not
Government company that made nearly $1 billion in profits last
year, primarily by making high-rate private student loans,
loans that have been documented to decrease home ownership.
Now, I have no doubt that Sallie Mae subsidiary in question
meets the legal eligibility requirements to be a member of the
bank, but I have some underlying--some concerns about the
underlying policy about how mutuals work here.
So first I have a specific question about Sallie Mae, and
that is, in past SEC filings, Sallie Mae has mentioned the
credit facility from the Home Loan Bank of Des Moines, but it
does not mention the credit facility in its most recent SEC
filing.
So, Mr. Swanson, does that mean that your bank has stopped
lending to Sallie Mae?
Mr. Swanson. Sallie Mae is a member of our bank through an
insurance company that is a subsidiary or affiliate of it. We
do not have any responsibility for their SEC reports----
Senator Warren. I was not asking that question. I was just
asking you a simple question. Have you stopped lending--you had
a multi-billion-dollar loan----
Mr. Swanson. They are still a member of our bank, and they
still have the ability to borrow, assuming that they provide
federally guaranteed student loans as sufficient capital for
their borrowings.
Senator Warren. So let me ask you about that, about the
activities that your bank supports and that it does not
support. Is there a clear line between what it is that you can
support and what you do not support?
Mr. Swanson. There is. There are two parts to the question.
One is who can be members, and Congress----
Senator Warren. No, that one I understand.
Mr. Swanson. ----establishes that. And then the second
point is when members borrow from us, what kind of collateral
is eligible for them to pledge to us? And our primary source of
collateral is home loans. We also take other forms of
commercial real estate, including multifamily. And then we are
permitted under our statute to take Government-guaranteed
securities. And in the height of the liquidity crisis and
economic crisis--in fact, it was early in 2008, Congress
through a resolution in the House actually asked the regulator
of the Federal Home Loan Banks to determine whether----
Senator Warren. I am sorry, Mr. Swanson, but----
Mr. Swanson. ----we could help with that liquidity.
Senator Warren. ----I am really going to be limited on
time. I know what law is here. I just want to ask the question.
In terms of the activities that you support, you are saying it
would be for home loans and for student loans, but just so I
can draw a clear line here, because we searched your Web site
and we are trying to get clear on this. It would not be, for
example, for other loans, to support other kinds of retail
business, to support payday loans, to support tobacco stores,
to support other kinds of activities. Is that right? You are
telling me that is the clear line, only student loans and real
estate loans?
Mr. Swanson. Our regulation and statute controls the
collateral that we take for loans, and Congress further
expanded the collateral for small institutions to include
agricultural loans and small business loans. But that is pretty
much the menu of collateral that we can take. Very restrictive.
Senator Warren. And so you will not lend in other areas and
other business activities. Is that right?
Mr. Swanson. We cannot lend on any other types of
collateral.
Senator Warren. The reason I raise this is because I think
it is important, if we are talking about mutuals and our
investment, in effect, in the housing market in mutuals, to
know exactly what activities would or would not be covered by
that, how much of it would go to housing and how much might be
going to other things.
I see that I am out of time. I am going to submit another
question for the record, but I just want to say it is a
question about whether or not mutuals will be able to compete
in a highly concentrated industry. I think we are all aiming in
the same direction, and that is that small banks have access,
perhaps through a mutual structure, to be able to get money.
But that has much higher administrative costs than a very
concentrated banking industry where you have got an issuer who
can lend to itself or to a small number of other issuers where
you have got issuers and the--when there is much more
concentration, it is much easier to cut down on the costs. And
so I am just going to have a question about that, but I will
submit it for the record. Thank you.
Chairman Johnson. Senator Manchin.
Senator Manchin. Thank you, Mr. Chairman.
To Mr. Loving, good to see you, Bill. As we know, West
Virginia is a small lender market like a lot of other States
throughout the country, and in States like ours, West Virginia
and the smaller nature, the rural that are not always served by
the larger financial institutions, how do we ensure that all of
our constituents and all of our people back home are going to
have access to the options from institutions like yours and to
ensure that the regulation is structured so that the smaller
lenders and smaller populations are not placed at a competitive
disadvantage?
Mr. Loving. Thank you, Senator, and it is indeed a pleasure
to see you. I think it is important that the structure and the
regulations that come forth from the Mutual is set forth so
that the underwriting guidelines can be used in all markets,
particularly if you are talking about West Virginia and other
rural markets. There is a particular type of housing option,
which is manufactured housing, that is--it is an affordable
option for many people not only in West Virginia but across
America.
Unfortunately, underwriting guidelines as they currently
exist will not allow the approval of a manufactured home, and
so that puts many individuals, constituents, in rural America
at a disadvantage.
Now, there are community-based banks that portfolios
products, and they are very good options and investments for
us. You know, as we have always said, we are relationship
lenders. We know the borrowers. We know where they are located.
And so it is a very acceptable risk, and so I think it is
important that we set forth regulation and guidance in
underwriting that allows access to all types.
Senator Manchin. Let me see if any of you want to answer
this one basically on the 10-percent deductible that must be
paid by the private markets. Do you think that is adequate? Too
much? Not enough? Overkill?
Mr. Cosgrove. Senator, we believe that it is too much. If
you look back, even in the height of the crisis, we believe a
4- or 5-percent capital ratio would have been sufficient to get
us through at that period of time. So we believe the 10 percent
is too high and could restrict----
Senator Manchin. You know, we are a little bit skittish
right now because of putting the taxpayers on the hook again.
We seem to have jumped on that hook before. But I am just
hopeful that you are able to be a little bit more expert--have
an expertise that would help us to get a figure that is going
to be adequate, not one that you would like but one that you
know will do the job and keep us out of danger.
Mr. Hampel. Senator, 10 percent on any single mortgage or
any security is not too much, but requiring the bond guarantors
to put up enough money to have 10 percent of their entire
exposure would be too much. There is not 10 percent of the
total amount of securities that would end up covered--you know,
that much capital is an enormous amount of capital, and----
Senator Manchin. You all agree that we were
undercapitalized--I mean, we were----
Mr. Hampel. Absolutely. Absolutely. But having on any
mortgages 10-percent coverage from the private sector before
the 2.5 percent of the FMIC would come in, that is providing,
with a 20-percent downpayment, 32.5 coverage for the taxpayer,
which is probably----
Senator Manchin. I think those of us who have signed as
cosponsors of the bill are more than willing to look at
something that is reasonable and that can be done and that is
going to be protective, and give us your reasons. If you could
submit that, that would be very helpful. There is a basic
question that has been alluded to but not answered directly.
And the Warner-Corker bill, S.1217, as it has been drafted, do
you believe it is the right direction to go for our country? Do
you believe it is the right direction to go for our financial
institutions and that it will do a much better job than Fannie
and Freddie that we are going to be replacing?
Mr. Swanson. We are an organization that is actually
chartered by the Government, and it is not appropriate for us
to take a position on any particular bill.
Senator Manchin. Bill.
Mr. Loving. I think the components of S.1217 certainly move
in the right direction. I think as we look toward tweaking, if
you will, some of the components of the bill, I think it
certainly is moving in the right direction.
Mr. Hampel. We have suggested improvements, but in general,
yes.
Mr. Cosgrove. We believe so as well, Senator. We believe
that the options beyond the Mutual need to be expanded, but,
you know, as long as that takes place, we believe it absolutely
is headed in the right direction.
Mr. Harwell. We believe it offers a workable solution, with
some tweaks.
Senator Manchin. Jeff.
Mr. Plagge. We absolutely agree. We think compliments to
the Committee for being so open on the discussion and, you
know, the access, the pricing, the whole process, and not only
on the front end of the conversation but welcoming us to
further conversation.
Senator Manchin. Have you all had--and my time is up. Have
you all had input basically with the sponsors and all the
people working on the bill right now?
Mr. Plagge. Yes.
Senator Manchin. Have they been receptive to your
suggestions?
Mr. Plagge. Very much so.
Senator Manchin. Thank you.
Chairman Johnson. Thank you again to all of our witnesses
for being here with us today. I also want to thank Senator
Crapo and all of my colleagues for their ongoing commitment to
protecting small lender access to the secondary mortgage
market.
This hearing is adjourned.
[Whereupon, at 11:34 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF RICHARD SWANSON
President and Chief Executive Officer, Federal Home Loan Bank of Des
Moines, on behalf of the Council of Federal Home Loan Banks
November 5, 2013
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, I am Richard Swanson, president and CEO of the Federal Home
Loan Bank of Des Moines. Thank you for the opportunity to speak to you
today on behalf of the Council of Federal Home Loan Banks (Council), an
association representing all of the Federal Home Loan Banks (FHLBanks).
The 12 regional FHLBanks are member-owned cooperatives with over
7,500 member financial institutions--of all sizes and types--
nationwide. The Federal Home Loan Bank of Des Moines (``FHLB Des
Moines'' or ``Bank'') is a valuable and reliable partner to nearly
1,200 community lenders throughout Iowa, Minnesota, Missouri, North
Dakota, and South Dakota. (Please see Attachment 1 for an in-depth
overview of the FHLBanks.)
At the outset, you are to be commended for the thoughtful and
deliberate approach being taken by the Committee to reform and
restructure the mortgage finance system. This is a complex task that
will have far reaching impact on a sector of the economy that dwarfs
most others. Some estimates place housing's share of the economy at
over 15 percent. \1\
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\1\ National Association of Home Builders, October 2013.
---------------------------------------------------------------------------
The Committee's focus today on protecting small lender access to
the secondary mortgage market is well placed. For the past 25 years, I
have devoted my career primarily to the success of small financial
institutions in meeting the housing finance needs of the communities
they serve, first as the president of a community bank and now as the
chief executive officer of a cooperative wholesale bank that provides
low cost funding and liquidity, as well as secondary market mortgage
support and other services, to its 1,200 members--almost all of whom
would be considered ``small lenders'' by any definition.
When the FHLBanks were created by Congress in 1932, virtually all
home loans were made by small lenders. Our central purpose then, as
now, was to provide lenders access to a reliable and stable source of
liquidity and funding so that they could meet the credit needs of their
communities at all points in an economic cycle. For small lenders who
originate home loans in excess of what can be held in their own
portfolios (i.e., as assets on their own balance sheets), many of the
FHLBanks have also provided access to the secondary market over the
past 16 years. The FHLBanks' experience with their mortgage programs is
certainly relevant to decisions that need to be made regarding the
future of the housing finance system, and we are uniquely positioned to
play an important role in the housing finance market of the future.
Recognizing that the focus of this hearing is on small lenders, it
is important to keep in mind that the presence and active participation
of members of all sizes and varied types, including thrifts, commercial
banks, credit unions, insurance companies, and community development
financial institutions, has been a key factor in the success of the
FHLBank cooperative model. The FHLBanks can help ensure that financial
institutions of all sizes have equal access to secondary mortgage
funding nationwide so that their customers can obtain competitive
market rate mortgage loans in all business cycles and their communities
remain vibrant.
Why Are Small Lenders Important to the Housing Finance System?
With deep customer relationships, community lenders are natural
mortgage lenders. Readily available access to additional sources of
funding and the secondary mortgage markets strengthens the ability of
community lenders to provide housing finance; likewise, the secondary
markets are strengthened by the quality of mortgages originated by
community lenders.
Community lenders remain significant players in housing finance,
notwithstanding the continuing pace of greater concentration being
observed in mortgage originations. The core strength community lenders
bring to the market is their deep knowledge of local markets and their
personal relationship with customers. In smaller communities and in
rural markets, community lenders are often the sole source of mortgage
credit as larger institutions typically focus on more densely populated
areas.
While not having the dominant share of originations, smaller
lenders originate a significant amount of mortgage loans. In 2012 there
were 7,047 lenders with less than $1 billion in total mortgage
originations, compared to 272 lenders above that amount. The lenders
with total originations less than $1 billion accounted for
approximately $528 billion, or 26 percent of the market last year. \2\
---------------------------------------------------------------------------
\2\ All data is from HMDA.
---------------------------------------------------------------------------
What Do Small Lenders Need To Serve Their Customers and Communities?
From the FHLBank Des Moines experience in assisting smaller lenders
in the mortgage markets, community lenders need the following to serve
their customers and communities:
The ability to provide a range of mortgage loan products to
meet customer needs in all market conditions:
Although some loans, such as adjustable rate and balloon
mortgages, can be held by small lenders in their own
portfolios, these lenders may need a source of funding for
those loans other than customer deposits.
Other mortgage loans, including long-term fixed-rate
loans, are not usually retained by smaller lenders due to the
difficulty of managing the interest rate risk these prepayable
loans present.
Access to the secondary market on terms fair to small
lenders.
Pricing of their mortgages based on the credit quality of
the loans they make, as opposed to the quantity of loans they
sell.
The ability to sell mortgages to the secondary market on a
single-loan basis that is impartial, efficient, and provides
equitable pricing for community lenders. Most community lenders
do not originate sufficient volume to pool and/or securitize
their mortgages.
The ability to service their mortgage loans or to sell
servicing of their mortgages on reasonable terms to a party who
will provide excellent service to, without competing for, their
customers.
How Do the FHLBanks Help Small Lenders Provide Home Loans?
The FHLBanks help small lenders provide mortgages in many ways:
The FHLBanks provide cost-effective, flexible funding for
loans that small lenders hold in portfolio, including funding
for adjustable rate and balloon mortgages, as well as long-term
fixed-rate loans. Managing the interest rate risk involved in
longer-term fixed-rate loans is challenging, and the FHLBanks
offer a variety of advance products to meet the needs of these
lenders. Members can obtain long-term fixed-rate funding to
match the mortgages held in portfolio. Amortizing advances are
available that can be matched to a portfolio of mortgages the
member holds. Advances are also available that allow members
the option to prepay the advance without a fee to manage the
interest rate and prepayment risks of the member's mortgage
portfolio.
The FHLBanks offer mortgage programs that enable smaller
lenders to sell long-term fixed-rate loans on reasonable terms.
With the development of the securitization market since the
creation of the FHLBanks, the majority of mortgage loans in the
United States are now pooled into securities that are held by
investors throughout the world. While providing funding and
liquidity to members through advances remains the core business
of the FHLBanks, supporting the success of members by offering
them access to the secondary mortgage market is another way
that the FHLBanks have fulfilled their mission.
When a community lender originates and later sells loans to
secondary market investors, the FHLBanks may provide warehouse
lending, funding the loan between the time the loan is closed
and the loan is sold.
The FHLBanks also provide technical assistance to members
in understanding how to quantify and manage the interest rate
risk from holding mortgage loans, as well as in documenting and
underwriting loans so that they qualify for sale to the
secondary market.
What Challenges Did Small Lenders Have Before the FHLBank Mortgage
Programs?
Prior to the FHLBank mortgage programs, community lenders had three
choices when originating conventional, fixed-rate mortgage loans, each
of which presented significant challenges for small lenders:
One option was for community lenders to hold the loans to
maturity on their own balance sheets. Although holding loans to
maturity on their balance sheets enabled community lenders to
retain customer relationships through loan servicing, this
option presented community lenders with difficulties in
properly funding and hedging the interest and prepayment risks
of long-term fixed-rate mortgage loans at a cost competitive
with secondary market alternatives.
Alternatively, the community lender could sell
conventional, fixed-rate loans to the secondary market.
However, when selling loans directly to Fannie Mae and Freddie
Mac, smaller lenders were disadvantaged by having to pay higher
``guarantee fees'' than larger lenders. The guarantee fee
structure rewarded high volume lenders, and further
disadvantaged smaller lenders by not compensating them for the
superior credit quality and performance of their loans.
Community lenders could also sell loans directly to a
larger financial institution which would aggregate mortgages
from many smaller lenders and sell them to the secondary
market. Under this option, while the larger institution might
receive the benefit of a volume discount from Fannie Mae or
Freddie Mac, this discount would not necessarily be passed on
to the small lender. This option often resulted in unfavorable
pricing to the small lender as a result of increased
transaction costs. This option also had the further
disadvantage of providing a potential competitor the
opportunity to solicit customers from the smaller lender.
The FHLBank Mortgage Programs
For the last 16 years, the FHLBanks have been providing members
with secondary mortgage market options through our MPF and MPP mortgage
programs. The FHLBanks have filled a need in the secondary mortgage
market by providing a competitive outlet for the sale of high quality
mortgage loans originated by community lenders. These programs give
participating members access to the secondary market through several
channels:
Mortgage Partnership Finance' (MPF')
Program--The MPF program involves the purchase of qualifying
conventional loans and Government-insured loans by
participating FHLBanks. This program offers a variety of risk
sharing arrangements (skin-in-the-game) while allowing
Participating Financial Institutions to continue to manage all
aspects of the customer relationship. The program was created
by the FHLBanks to fill a need in the secondary mortgage market
for community lenders who were unable to sell mortgages at
prices that reflected their superior credit quality. The MPF
Program operates on the premise that by combining the credit
expertise of a local lender with the funding and hedging
advantages of a FHLBank, a stronger, more economical and
efficient method of financing residential mortgages results.
Mortgage Purchase Program (MPP)--Similar to the MPF
program, the MPP program provides members the ability to sell
conforming loans at a competitive rate with the potential to
recognize additional revenue if the loan performs well. Under
the MPP program the FHLBank is protected against credit loss
through a feature called the lender risk account (LRA), which
again serves as the member/seller's ``skin-in-the-game.'' Under
the LRA, funds are set aside to cover potential loan losses. If
the funds are not needed, they are returned to the seller over
time. The seller has the potential for a higher all-in return
if it originates and sells mortgages of high credit quality.
MPF Xtra' Program--The MPF Xtra program allows
members to sell their loans through participating FHLBanks to
Fannie Mae at a more favorable price than they could obtain
individually, but without any risk sharing obligation. This
pass-through service, by which members benefit from a form of
volume discount, complements the other FHLBank mortgage
programs.
By using the FHLBank mortgage programs, community lenders have the
ability to:
Gain more favorable access to the secondary market, since
the FHLBank mortgage programs are designed primarily for
smaller lenders.
Control the origination and underwriting process.
Engage in a business relationship with a secondary market
partner that is a cooperative in which they have an ownership
interest as well as a voice, rather than with a potential
competitor for their customers.
Offer competitive mortgage pricing to their customers in
spite of their smaller size and volume.
Retain a small portion of credit risk in their loans (skin-
in-the-game) while transferring the interest rate, prepayment
and liquidity risks to the FHLBanks.
Increase their income by receiving future credit
enhancement fees based on the credit performance of the
mortgages they originate.
Determine whether to service their mortgages or transfer
the servicing to a noncompetitor that has been prequalified as
a servicer by their FHLBank.
Preserve their customer relationships.
The FHLBanks' MPF and MPP mortgage programs have proven to very
popular with FHLBank member institutions and have provided great value
to them. The credit history of the programs has been exceptional.
Following is a summary of their performance over the past 16 years:
Over 1,500 member institutions, located in all 50 States,
have used one of these programs to provide mortgages for their
customers. Of these members:
70 percent have assets of $500 million or less;
30 percent have assets of more than $500 million.
The median size of these mortgages is about $135,000.
The credit quality of mortgage loans funded by FHLBank
members has proven to be excellent. The programs have
experienced extremely low losses, particularly conventional
loans funded through a program that uses a risk sharing
structure that ensures member lenders keep ``skin-in-the-
game.''
Of the $202.5 billion in conventional mortgages funded
through either the MPF traditional program or the MPP program
since their inception, only $303.6 million of losses have been
realized, as of June 30, 2013. This represents a loss ratio of
only one-fifteenth of 1 percent--0.15 percent or 15 basis
points.
Only 1.78 percent of these loans were 90 days or more
delinquent, or slightly more than half of the national average
of 3.24 percent. \3\
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\3\ As reported by the Mortgage Bankers Association's National
Delinquency Survey for June 30, 2013.
The very low level of credit losses (15 basis points) sustained by
FHLBanks and their participating members since the beginning of these
programs is truly remarkable considering it includes the period of time
when the most severe economic stresses in the housing and credit
markets in over 80 years were experienced.
The FHLBank risk sharing mortgage programs are built on the
foundation of sound underwriting by our members who originate high
quality mortgages from customers they know. Consistent with secondary
market conforming loan requirements, the mortgages purchased through
these programs are required to have loan-to-value ratios (LTVs) not
greater than 80 percent of appraised value at origination, either
through downpayments or mortgage insurance. In addition, these loans
were made by community lenders who have the best interests of their
retail customers in mind. As a result, most community lenders have such
confidence in the credit quality of the loans they make that they are
willing to share the credit risk associated with their own mortgage
originations.
I would like to briefly describe my Bank's experience with credit
risk sharing. The way the credit risk sharing works under the MPF
Traditional 125 program, for example, is that the first layer of losses
for each Master Commitment is paid by FHLB Des Moines up to the amount
of the First Loss Account (FLA) which is 1 percent of the delivered
amount of loans in the Master Commitment. The member institution that
originated the mortgages then provides a second loss credit enhancement
obligation (CE Obligation) for each Master Commitment. On average this
is about 4 percent of the delivered amount of loans. To the extent that
losses do not exceed the FLA, the member institution is compensated for
retaining a portion of the credit risk and receives a monthly credit
enhancement fee from FHLB Des Moines. Loan losses beyond the first and
second layers are absorbed by FHLB Des Moines.
The following is a typical example of how the credit risk sharing
functions for a member of FHLB Des Moines: A community lender in
eastern Iowa has been a FHLB Des Moines Participating Financial
Institution since 2004. Over the past 9 years this institution has sold
the Bank 3,481 mortgage loans for a total of $393 million. The average
loan size is $112,000. The member institution services these loans and
to date has received $2.1 million in cumulative servicing fees plus an
additional $965,000 in credit enhancement fees (reward for having skin-
in-the-game). These fees continue to accumulate over the life of the
loans. If the institution had sold those same loans to any other
investor it would not have received the credit enhancement fee of
almost $1 million of noninterest income. Only $13,000 in losses have
been realized to date on the nearly $400 million in mortgage loans for
which this member retains ``skin-in-the-game.'' These losses were
covered by FHLB Des Moines through the First Loss Account (FLA), but
reduce future credit enhancement fees to the member.
What Do Small Lenders Need To Succeed in a Reformed Secondary Mortgage
Market?
Under any mortgage finance reform proposal, including S.1217, two
fundamental challenges must be met if small lenders are to be able to
compete successfully and serve the needs of their customers and
communities.
First is the challenge of small loan volume. How can a few
loans made each month by many community lenders be sold to the
secondary market on terms that are competitive with large
volume lenders?
Second is the challenge of obtaining fair pricing for the
value of mortgages that come from community lenders. How can
small lenders receive better pricing for their mortgages if
they demonstrate better performance, and therefore have higher
value to secondary market investors?
The FHLBanks can play a key role in helping meet both these
challenges.
How Can the FHLBanks Support Small Lenders in a Reformed Secondary
Market?
Depending on how the legislation is finally structured and accepted
by the marketplace, the FHLBanks could play an even larger role in
helping smaller lenders successfully access the secondary market.
Addressing the Challenge of Volume
Building upon the deep relationships we already have with our
members, the FHLBanks have demonstrated the capability of aggregating
small origination volumes from many lenders to produce an overall
combined volume that can be competitively priced in the secondary
market. The FHLBanks have the potential to further support their
members as an intermediary to the secondary market of the future in the
roles of aggregating, pooling, and sale or securitization of member
mortgages.
So far our mortgage programs either purchase loans from members to
be held to maturity on the balance sheets of the FHLBanks, or they
enable a pass through sale by members directly to the secondary market.
In a reformed secondary market, Fannie Mae and Freddie Mac will no
longer dominate the aggregating, pooling and securitization functions.
It appears these functions will be distributed among more parties,
potentially including the FHLBanks.
By aggregating loans from our many members, and holding them on our
balance sheets--not for long-term investment but for a sufficient time
to enable pooling of sufficient volume for efficient and well priced
issuance of mortgage-backed securities in the secondary market, the
FHLBanks will be able to further improve the pricing of secondary
market loans for our smaller members.
By purchasing mortgages from community lenders the FHLBanks would
hold mortgages on their balance sheets for a period of time until
mortgages acquired from multiple members could be efficiently pooled
for sale or securitization into the secondary market. By serving this
aggregation and pooling role, FHLBanks could utilize their unique
qualities and competitive strengths to support their members in
originating mortgages. At the same time, by selling pools of mortgages
from their balance sheets into the secondary market at more favorable
pricing than their members could obtain individually, the FHLBanks
would roll over their portfolios and would not be as constrained by
volume limitations or challenges in managing long-term interest rate
risk.
The secondary mortgage market envisioned by S.1217 would allow for
the FHLBanks to serve in such an expanded role as mortgage aggregators.
This could enable the FHLBanks to provide significant additional
benefits to their members in addressing the challenges of obtaining
competitive secondary market pricing for smaller volume community
lenders.
Addressing the Challenge of Value
In the reformed secondary market contemplated by S.1217, any pool
of mortgages securitized with the backstop Government guarantee would
have to obtain private capital insurance covering the first 10 percent
of losses. Assuming that this private capital loss coverage is provided
by multiple parties meeting the capital and other requirements of FMIC,
we would expect to monetize superior value of loans we purchase from
community lenders by obtaining competitive bids for that loss coverage.
Pools of higher value mortgages should command a lower premium.
The cost of loss coverage might be further reduced if our members
elect to retain part of the risk on mortgages they sell to their
FHLBank as they do under our portfolio mortgage programs. Such a
``skin-in-the-game'' program might be very popular among smaller
lenders if it results in an even better price for their mortgages or a
credit enhancement fee if their mortgages perform well.
If the reformed secondary market does not provide for competition
by qualified providers of private capital first loss coverage of
securitized mortgages, it is likely to result in a secondary market
that rewards loan volume and not loan quality. Assuming FMIC charges
uniform premiums for all securities backed by the Government guarantee,
the structure and regulation of the private first loss guarantors will
be very important in order to assure competition that, in turn, will
enable the FHLBanks to assist smaller lenders in receiving fair pricing
for their mortgage loans.
Housing finance reform legislation should also ensure that FHLBank
members who are willing to retain some level of risk for the
performance of their mortgages can be rewarded for superior quality
through lower private guarantor fees up front and/or credit
enhancements fees paid over the life of the mortgages if they perform
well. Building upon their existing ``skin-in-the-game'' mortgage
programs, FHLBanks can perform a valuable function by facilitating the
retention of some risk by smaller members on their mortgages to reduce
the cost of private capital loss coverage, thereby allowing smaller
lenders to be appropriately rewarded for the value of their loans.
S.1217--The Housing Finance Reform and Taxpayer Protection Act of 2013
We are pleased that S.1217 recognizes the importance of maintaining
a role for institutions of all sizes in the housing finance system of
the future, and contains provisions intended to preserve equal and
reliable secondary market access for small and midsize community
financial institutions to help maintain reliable access to mortgage
credit throughout all parts of the country. We appreciate that the bill
provides different options for the FHLBanks to serve their members as
the housing finance system of the future evolves. With the support and
guidance of our members, we are open to exploring opportunities to
expand our support of community lenders. At the same time, we emphasize
the paramount importance of maintaining and protecting our continuing
role as a reliable source for our members of liquidity and funding
through advances.
S.1217 has several features that could enable smaller lenders to be
successful in providing mortgages in the future. The bill presents a
hybrid solution that includes substantial private capital and a
catastrophic Government backstop. This hybrid solution includes private
capital for losses related to mortgage defaults; but, in times of
financial crisis, when private capital is insufficient to absorb those
losses, the Government would step in. Mortgage borrowers who benefit
from the Government backstop would pay a fee to compensate the
Government for potential losses. All non- Ginnie Mae, Government-
guaranteed securities would use a common securitization platform which
would produce a more liquid market, facilitate loan modifications in
future downturns, give issuers operating flexibility at a low cost, and
permit multiple originators to sell mortgages into single securities
with access to the Government guarantee.
S.1217 also contains provisions that would substantially alter the
regulatory framework of the FHLBanks. As introduced, S.1217 transfers
the supervisory and regulatory functions relating to the FHLBanks from
the FHFA to the FMIC on the ``transfer date,'' which is 1 year after
the date of enactment. One of the three offices within FMIC provided in
the bill is an Office of Federal Home Loan Bank Supervision, headed by
a Deputy Director appointed by the FMIC board, to regulate and
supervise the FHLBanks.
Regulatory oversight of the safety and soundness of the FHLBanks'
traditional liquidity and advance business on behalf of their members
has little to do with the anticipated secondary mortgage market
supervision and insurance functions of the FMIC. Accordingly the
Council recommends that the FHFA's existing supervisory and regulatory
authority with respect to the FHLBanks not be transferred to the FMIC.
Instead, if the FHFA is abolished, the FHLBanks should be supervised by
a stand-alone independent regulator governed by a board structure, the
members of which reflect a balance of experience and knowledge,
including housing finance and community lending.
Under S.1217, the FMIC is given extensive duties and
responsibilities, including ensuring to the maximum extent possible a
liquid and resilient housing finance market and the availability of
mortgage credit while minimizing any potential long-term negative cost
to the taxpayer. These broad responsibilities of the FMIC over the
entire housing finance market, along with the wide ranging authorities
accompanying them, could potentially create conflicts with, and could
certainly overshadow and impede, effective regulatory focus on the
FHLBanks. The FHLBanks and their members have experienced the adverse
effects of regulatory conflicts in the past, in preFIRREA times, and
believe that it would be unwise to repeat that experience.
Conclusion
Mr. Chairman, thank you again for the opportunity to appear before
you today. I would be happy to answer any questions. On behalf of the
Council, I look forward to working with the Committee as you continue
your work on this important matter.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF WILLIAM A. LOVING, JR.
President and Chief Executive Officer, Pendleton Community Bank,
Franklin, West Virginia, and Chairman, Independent Community Bankers of
America
November 5, 2013
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, my name is William A. Loving, Jr., and I am president and
CEO of Pendleton Community Bank, a $260 million asset bank in Franklin,
West Virginia, that serves four rural markets in West Virginia and one
Virginia community. I am also chairman of the Independent Community
Bankers of America and I testify today on behalf of the nearly 7,000
community banks we represent. Thank you for convening this hearing on
``Housing Finance Reform: Protecting Small Lender Access to the
Secondary Mortgage Market''.
We are grateful for your recognition of the critical importance of
preserving community bank access in any reforms to the housing finance
system. It is essential to borrowers and the broader economy that the
details of any reform are done right. ICBA sincerely appreciates the
opportunity to work with the Committee to craft housing finance reform
legislation. We look forward to providing ongoing input on the impact
of reform on community banks and their customers.
Community Banks and the Secondary Mortgage Market
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 a recent survey, nearly 30
percent of community bank respondents sell half or more of the
mortgages they originate into the secondary market. \1\ 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.
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\1\ ICBA Mortgage Lending Survey. September 2012.
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Secondary market sales also play a critical role in helping
community banks maintain their capital levels. While many community
banks remain well-capitalized following the financial crisis, others
are being forced by their regulators to raise new capital above minimum
levels. The new Basel III rule will increase capital requirements. With
the private capital markets still largely frozen for small and midsized
banks, some are being forced to reduce their lending in order to raise
their capital ratios. In this environment, the capital relief provided
by selling mortgage loans in the secondary markets is especially
important. Selling mortgage loans into the secondary market frees up
capital for additional residential lending as well as other types of
lending, such as commercial and small business, critical to supporting
credit flow in small towns and communities.
Pendleton Community Bank holds most of its mortgage loans in
portfolio. Our current portfolio includes nearly 1,500 loans valued at
$76.6 million. However, in recent years we've sold an increasing volume
of loans into the secondary market. In 2013, to date, we've sold 35
loans with a value of $4.5 million, which is already more in number and
value than we sold all of last year, or in any prior year. We would
sell more loans but are challenged, like many community bankers in
small towns or rural areas, in identifying ``comparable'' sales in our
rural markets where properties have unique characteristics which
frequently disqualify them from secondary market sales.
Pendleton's secondary market sales are driven by customer demand
for 30-year fixed-rate loans. As a community banker, meeting this
customer demand is critical to our broader customer relationships and
to our business model. As the housing market recovers, I expect we will
continue to sell an increasing number of loans into the secondary
market. Secondary market access is critical even for a primarily
portfolio lender such as Pendleton.
Preserve What Works for Community Banks
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.
Under the current GSE model, selling loans is relatively simple.
Banks take out commitments to sell loans on a single-loan basis and are
not required to obtain complex credit enhancements except for private
mortgage insurance for loans in excess of 80-percent loan-to-value or
other guarantees. Any future secondary market structure must preserve
this relatively simple process for community banks and other small
lenders that individually do not have the scale or resources to obtain
and manage complex credit enhancements from multiple parties.
Potential Reforms
There is widespread agreement the secondary market must be reformed
to prevent or greatly reduce the impact 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). The private sector should return to its
traditional role providing the majority of the capital in mortgage
finance. 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.
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, policy makers must be
careful not to create a new system that eradicates liquidity for all
but the few 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.
Mutual
ICBA supports the creation of a Mutual Securitization Corporation
(Mutual), as described in the Housing Finance Reform and Taxpayer
Protection Act (S.1217), which would secure access to the secondary
market for community banks and other small originators and would allow
them to sell loans on a single loan basis, be paid in cash, and to
retain the servicing rights. However, the success of the Mutual depends
on the details and the implementation. The key considerations are:
capitalization, technology, permitted activities, eligible sellers, and
governance.
Capitalization
In order to provide equitable access, including the competitive
pricing of the required third party credit enhancements and guarantees,
the Mutual must be well-capitalized. While the exact level of
capitalization will need to be determined by policy makers and the
housing finance regulator, it is clear multiple sources of capital will
be needed. If community banks and other small originators are required
to provide the majority of the initial capitalization, the cost to the
member institutions would be prohibitive. ICBA recommends using the
profits of the current GSEs--or at least a portion of them--to
capitalize the Mutual. The Mutual would be required to repay the
Government over time through its operational earnings. An annual
maintenance fee charged to all sellers to the Mutual, not to exceed
$1,000, would also help to offset some of the operational costs of the
Mutual.
Technology
In order to facilitate the transition to a new system, all loan
aggregation infrastructure, including any automated underwriting,
uniform appraisal delivery data portal, loan delivery systems, pooling
and pricing, committing systems, cash transfer systems, loan activity
reporting, and remittance systems should be transferred to the Mutual
from the GSEs. Additionally, it will be necessary to transfer key GSE
staff responsible for these functions along with the technology.
Eligible Sellers to the Mutual
The question of eligible sellers is critical to the viability and
competitiveness of the Mutual and its ability to provide liquidity for
all market participants. ICBA recommends all current approved GSE
sellers and servicers in good standing with assets up to $500 billion
be eligible to sell and service mortgages through the Mutual. In
addition, the Federal Home Loan Banks and currently approved mortgage
banking companies with an annual mortgage production of less than $100
billion should be eligible to sell to the Mutual. While the Mutual is
targeted towards small to midsized lenders, larger institutions may
prefer to sell loans for cash rather than securitize them. Allowing
these larger lenders to access the Mutual will help build the scale
needed to secure competitive terms for third party credit enhancements,
improving liquidity for all sellers to the Mutual.
ICBA also believes the Mutual should be permitted to manage a
limited retained portfolio comprised solely of eligible mortgage loans
acquired from eligible sellers to the Mutual, to facilitate optimal
pooling, credit enhancement, and securitization activities.
Governance and Regulation of the Mutual
To ensure proper representation of all the lenders who would use
the Mutual to access the national secondary market, ICBA recommends a
Board structure and the one member one vote voting structure similar to
the FHLBs.
The Mutual, and the entire secondary market that uses any type of
Government guaranty (apart from the FHLBanks, which would be regulated
separately), should be regulated by an entity with powers and oversight
duties similar to the FDIC. In addition to oversight of the Mortgage
Insurance Fund, this regulator should set standards and review and
approve all entities seeking to be issuers, guarantors, servicers,
document custodians, credit enhancement providers, entities that intend
to structure or restructure MBS or mortgage debt issued with a
Government guarantee.
The housing finance regulator should have a governance structure
similar to the FDIC. The CEO of the Mutual, at least one Mutual board
member, and one FHLB member should have seats on the housing finance
regulator board.
The Mutual should have a specific duty to serve all markets at all
times, including small town and rural markets. This would include
developing programs, underwriting guidelines, and appraisal rules to
encourage the sale/securitization of loans on manufactured housing and
housing in rural areas and small towns. ICBA would strongly support
appraisal guidelines that would permit rural banks to sell more loans
into the secondary market. The Mutual should be charged with developing
both underwriting and appraisal guidelines that acknowledge the
distinctive features of small town and rural markets, such as unique or
large acreage collateral properties or borrowers who may have seasonal
or farming income, and bar discrimination based on these features.
Today it is difficult, if not impossible, to sell loans with such
characteristics to the GSEs.
Role of the Federal Home Loan Banks
The Federal Home Loan Banks (FHLBanks) have several mortgage
programs currently popular with community banks. Community bankers find
the FHLBank mortgage programs recognize and compensate them for the
high-credit-quality loans they originate. The FHLBank mortgage programs
also permit the community bank to retain the servicing on mortgage
loans sold, thereby maintaining the bank's relationships with their
customers. Nearly 90 percent of ICBA members are FHLBank members.
The FHLBanks should be preserved as an access point to the national
secondary market for community banks and should be eligible to sell
loans to the Mutual. The additional option of selling to the FHLBanks,
an arrangement with which many community banks are comfortable, is
fully consistent with the role of a Mutual, would provide two access
points, and would ease the transition to a new system.
ICBA is concerned about proposals that would rely on the FHLBanks
as the sole aggregators for community banks. Community banks need more
secondary market options, not fewer. However, secondary market
activities do pose new risks for the FHLBanks. In the past, some
FHLBanks that concentrated more heavily on their mortgage programs
experienced serious financial problems. Though ICBA supports the
FHLBanks role in the secondary market, the regulator must be vigilant
that FHLBank secondary market business not be a distraction from the
primary function of the FHLBanks: providing liquidity and wholesale
funding through the advance business. Community banks depend on FHLBank
advances, and secondary market reform should not put this important
source of liquidity at risk.
Regulatory oversight of the FHLBs should remain separate with an
independent agency as currently structured.
Underwriting and Servicing
Only loans meeting the Qualified Mortgage (QM) definition, as
defined by the Consumer Financial Protection Bureau (CFPB), should be
eligible for securitization and/or sale through the Mutual and contain
a Government guaranty. ICBA does not believe additional underwriting
criteria should be set in statute. Rather, underwriting standards
should be set and administered by the housing finance regulator for
loans and securities seeking a Government guarantee.
Servicing standards should be consistent with current GSE servicing
standards, and should accommodate any exemptions small servicers enjoy
under the CFPB mortgage servicing rules.
Transition From GSEs to the New Guarantor Structure and Mutual
The transition from the current GSEs to the new credit enhancement/
guarantor structure must be gradual and transparent to prevent the
disruption of the flow of funds into the housing market. This will
allow the marketplace the opportunity to properly evaluate the value of
the new credit enhancement/guarantor structures along with any changes
in the pass-through structures of the mortgage-backed securities
issued. In particular, the plan must address the need to maintain
liquidity and investor acceptance of the new mortgage-backed
securities.
This could be accomplished by preserving the GSEs as a backstop
during the construction and transition to the new securitization
platform. Newly issued GSE securities could be conformed to credit
enhancement structures similar to the proposed structures to allow the
market to adapt to the change. Selected functions and technologies of
the GSEs--such as the GSEs' cash window pooling, credit enhancement,
securitization processes--could be moved to the Mutual, while more
market-critical functions, such as the cash window, remain at the GSEs.
The new guarantor structure (the FMIC guaranty, in the case of S.1217)
could then be substituted for the GSE guaranty, followed by a period
during which the regulator monitors market reaction and acceptance.
Once the regulator determines the market has accepted the FMIC
guaranty, it could be made available to all approved issuers, and
finally, the last GSE backstop, the cash window aggregation activities,
could be moved to the Mutual and the GSEs could be shut down. Other
methods could be equally effective in avoiding market disruption, but
it is critical that the transition be carried out with transparency and
deliberation.
S.1217
ICBA is grateful to Senators Warner, Corker, and all the Committee
cosponsors for introducing S.1217, the Housing Finance Reform and
Taxpayer Protection Act. ICBA sincerely appreciates the opportunity to
provide input into this bill. We are encouraged by the inclusion of
certain provisions to address ICBA's concerns. In particular:
The Mutual Securitization company would secure access to
the secondary market for community banks and other small
originators and would allow them to sell loans for cash and to
retain servicing rights.
The Federal Home Loans Banks would also be allowed to issue
securities, creating another access point for community banks.
Limiting issuers to no more than 15 percent of outstanding
guaranteed securities would reduce concentration in the
securitization market by large banks or Wall Street firms.
The FMIC guarantee, well-insulated by private capital,
would insure the securitization market continues to function in
times of market stress.
These provisions would help provide access for community banks to
the secondary market without requiring them to take on the additional
risk and cost of securitizing loans.
ICBA continues to evaluate and make recommendations for improving
S.1217, so that it better addresses the concerns identified in this
testimony. As noted above, we recommend significantly broadening access
to the Mutual so that lenders with up to $500 billion in assets are
eligible to sell loans.
Another major concern is that the proposed system is significantly
complex relative to the current system. Credit enhancements require
significant scale as well as legal, compliance, and technological
resources. In addition, the management of multiple counterparties can
create additional risks for both the marketplace and the issuers
themselves. Because these risks would be too great for small lenders to
bear, requirements for complex credit enhancements as part of a
secondary market housing finance system would force additional market
consolidation and shift yet more control to the largest lenders and
Wall Street firms. Community banks must be accommodated with a simple,
direct method of selling loans.
Closing
Mortgage lending is very important to community banks as they serve
their customers. They make high-quality loans in their local
communities funded by local deposits. However, they cannot, in all
circumstances, hold 100 percent of the mortgages they originate in
portfolio. Customer demand for long-term fixed-rate mortgages and the
imperative of reserving their balance sheets to serve the other credit
needs of their communities require all community banks have robust
secondary market access. Equal and straightforward access to the
secondary market is a critical component for community banks. It is
very important efforts to restructure the housing finance system
continue to provide this essential portal to small financial
institutions.
ICBA is pleased to see a robust debate emerging on housing finance
reform. We look forward to continuing to work with Members of this
Committee to create a system in which community banks and lenders of
all sizes are equally represented and communities and customers of all
varieties are served.
______
PREPARED STATEMENT OF BILL HAMPEL
Senior Vice President and Chief Economist, Credit Union National
Association
November 5, 2013
Chairman Johnson, Ranking Member Crapo, Members of the Committee:
Thank you very much for the opportunity to testify at today's hearing.
My name is Bill Hampel, and I am senior vice president and chief
economist at the Credit Union National Association (CUNA). CUNA is the
largest credit union advocacy organization in the United States,
representing America's State and federally chartered credit unions and
their 97 million members. I am very pleased to present the credit union
system's view on housing finance reform proposals before the Committee.
The system of housing finance, as it existed up until 2007, was one
of many causes of the financial shock and deep recession of the last
decade. With the two major Government-sponsored enterprises (GSEs) in
conservatorship and the private secondary market still moribund, major
overhaul of the system is required. The design flaws of the old system
must be addressed. New rules will be required. Congress must get reform
legislation right or risk further damage to an already fragile economy.
This testimony will focus on the key components of housing finance
reform legislation from the perspective of the credit union system,
using S.1217, the Housing Finance Reform and Taxpayer Protection Act,
as base from which to react and recommend changes.
Overview of Credit Union Mortgage Lending
As member-owned, not-for-profit financial cooperatives, credit
unions strive to meet their members' financial services needs, and
offering home mortgages is an important part of meeting member demand.
Some credit unions have made first mortgage loans since their
inception, but most did not offer mortgage lending services until the
1970s. Credit unions now serve more than 97 million Americans, and
first mortgage lending is an increasingly important component of credit
union lending. First mortgages now account for 41 percent of the total
loans held in portfolio, with the remaining 59 percent of a credit
unions portfolio comprised of second mortgages (12 percent), consumer
loans (41 percent) and small business loans (7 percent). Just last year
alone, credit unions originated $123 billion of first mortgages,
representing 6.5 percent of the entire mortgage origination market.
Credit unions are now significant players in residential real estate
finance, and historically our market share has risen annually to
reflect the growing demand of our members.
Currently, 4,295 credit unions (63 percent) offer first mortgages
to their members. Because larger credit unions are more likely to offer
mortgages than smaller ones, 93 million (96 percent) of all credit
union members belong to a credit union that offers first mortgages. It
is clear that consumers are choosing credit unions more and more to be
their mortgage lenders, and as Congress considers housing finance
reform, it is critical that credit unions have equitable and readily
available access to a functioning, well-regulated secondary market and
a system that will accommodate the member demand for long-term fixed-
rate mortgage products in order to ensure they can continue meeting
their members' mortgage needs.
From 2000 to 2006, annual credit union originations of first
mortgages averaged just under $55 billion. As the subprime mortgage
crisis began to weaken the secondary market for mortgage loans in 2006
and 2007, credit union origination volume rose dramatically. Homebuyers
increasingly turned to their credit unions as other sources of mortgage
lending dried up. Credit unions were able to meet this demand because
at the time they primarily funded loans from their own portfolios, and
their conservative financial management as cooperatives meant they were
less affected by the financial crisis than many other lenders. By 2009,
credit union originations rose to $94 billion. New loan volume fell to
just above $80 billion in 2010 and 2011 before rising to $123 billion
in 2012 and $132 billion the first half of 2013, at an annual rate.
This recent increase in volume is due to the desire on the part of many
members to refinance their loans given very low interest rates.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Total first mortgage originations from all lenders peaked at $3.1
trillion in 2005 before plunging to only $1.5 trillion in 2008. Since
then, originations have recovered to just over $1.8 trillion in 2012,
at an annual rate of $2 trillion in the first half of 2013. Because
credit union lending increased while the broader market was wracked by
the financial crisis, the credit union share of mortgage lending
sharply increased, from less than 2 percent in 2005 to almost 6 percent
in 2008. Since then, as the broader mortgage market recovered, credit
union lending continued to grow to the point that it accounted for over
6 percent of the market in 2012 and 2013.
Historically, credit unions have been largely portfolio lenders.
From 2000 to 2008, credit unions sold only a third of first mortgage
originations, ranging from a low of 26 percent in 2007 to a high of 43
percent in 2003. The decision of whether to hold or sell a loan depends
primarily on asset-liability-management issues, essentially the need to
manage interest rate risk, but also at times, depends on the
availability of liquidity in the credit union. Asset liability
management hinges on such factors as the level of interest rates, the
relative demand for fixed versus adjustable loans from members, the
amount of fixed-rate loans and other longer-term assets already on a
credit union's books and the maturity of the credit unions funding
sources. Managing credit risk is not the primary factor in secondary
market decisions by credit unions. However, even for those loans
intended to be held in portfolio, credit union prudential regulators
strongly encourage writing all first mortgages to conformed standards
for potential sale.
As long-term interest rates plunged in 2009 and again in 2011,
credit unions found it increasingly important to sell longer-term,
fixed-rate mortgages to avoid locking in very low earning assets for
the long term. As a result, the proportion of loans sold almost
doubled, to an average of 52 percent from 2009 to the present.
Servicing member loans is very important to credit unions, for a
number of reasons. As member-owned cooperatives, credit unions are
driven by a desire to provide high quality member service. Many credit
unions are reluctant to entrust the core function of serving members to
others, unless they have a stake and a say in the entity doing the
servicing. Credit unions are also concerned that third-party servicers
might use the data they gather about credit union members to market
competing products or services. In addition, credit unions benefit from
the steady servicing income stream. As such, many credit unions service
both the substantial portfolios of loans they hold on their own balance
sheets, and the loans they have sold to the secondary market.
Currently, in addition to the $258 billion of first mortgages that
credit unions hold in portfolio, they also service $151 billion of
loans they have sold.
The credit quality of credit union first mortgages held up
remarkably well during the recent financial crisis, especially when
compared to the experience of other lenders. Other lenders experienced
net charge-off rates four times higher than those at credit unions.
Prior to the Great Recession, annual net charge-off rates on
residential mortgage loans at both banks and credit unions were
negligible, less than 0.1 percent. However, as the recession took hold,
losses mounted. At credit unions, the highest annual loss rate on
residential mortgages was 0.4 percent. At commercial banks, the
similarly calculated loss rate exceeded 1 percent of loans for 3 years,
reaching as high as 1.58 percent in 2009.
There are two reasons for this remarkable record at credit unions.
First, as cooperatives, credit unions tend to be more risk-averse than
stock-owned institutions. The incentives faced by credit union
management (generally uncompensated volunteer boards, the absence of
stock options for senior management and board members, the absence of
pressure from stockholders to maximize profits) discourage management
from adopting high-risk, higher-return strategies in pursuit of high
profits. As a result, credit union operations are more consumer-
friendly, less risky and subject to less volatility over the business
cycle. This largely explains why credit unions were able to increase
lending as the financial crisis deepened.
Second, since the bulk of credit union lending is intended to be
held in portfolio rather than sold to investors, credit unions tend to
pay particular attention to such factors as a member's ability to repay
a loan, proper documentation and due diligence and collateral value
before granting loans.
We believe that in addition to ensuring access to the secondary
market for credit unions, it is also important that the housing finance
system Congress puts in place accommodates the demand of credit union
members and other consumers for long term, fixed-rate mortgage
products. The data suggest that credit union members overwhelmingly
prefer fixed-rate mortgages. Over the past 10 years, our members have
chosen a fixed-rate mortgage over 80 percent of the time. Just in the
first half of 2013, 83 percent of the mortgages issued by credit unions
were at fixed rates. Congress should acknowledge that the American
homebuyer prefers fixed-rate mortgages and do everything in its power
to ensure this important mortgage product remains a valuable part of
housing finance.
Credit Union Principles for Housing Finance Reform
As we have testified in the past, CUNA supports the creation of an
efficient, effective, and fair secondary market with equal access for
lenders of all sizes. To this end, CUNA supports housing finance reform
proposals that are consistent with the following principles, and have
been subject to full and fair consideration with respect to potential
impact on all market participants:
Neutral Third Party
There must be a neutral third party in the secondary market, with
its sole role as a conduit to the secondary market. This entity would
necessarily be independent of any firm that has any other role or
business relationship in the mortgage origination and securitization
process.
Equal Access
The secondary market must be open to lenders of all sizes on an
equitable basis. CUNA understands that the users (lenders, borrowers,
etc.) of a secondary market will be required to pay for the use of such
market through, for example, fees, appropriate risk premiums and other
means. However, guarantee fees or other fees/premiums should not have
any relationship to lender volume.
Strong Oversight and Supervision
The entities providing secondary market services must be subject to
appropriate regulatory and supervisory oversight to ensure safety and
soundness, for example by ensuring accountability, effective corporate
governance and preventing future fraud; they should also be subjected
to strong capital requirements and have flexibility to operate well and
develop new programs in response to marketplace demands.
Durability
The new system must ensure mortgage loans will continue to be made
to qualified borrowers even in troubled economic times. Without the
backstop of an explicit federally insured or guaranteed component of
the revised system, CUNA is concerned that private capital could
quickly dry up during difficult economic times, effectively halting
mortgage lending altogether.
Financial Education
The new housing finance system should emphasize consumer education
and counseling as a means to ensure that borrowers receive appropriate
mortgage loans.
Predictable and Affordable Payments
The new system must include consumer access to products that
provide for predictable, affordable mortgage payments to qualified
borrowers. Traditionally this has been provided through fixed-rate
mortgages (such as the 30-year fixed-rate mortgage), and it is
important that qualified borrowers continue to have access to products
that provide for predictable and affordable mortgage payments.
Loan Limits
The new housing finance system should apply a reasonable conforming
loan limit that adequately takes into consideration local real estate
costs in higher cost areas.
Affordable Housing
The important role of Government support for affordable housing
(defined as housing for lower income borrowers but not necessarily high
risk borrowers, historically provided through FHA programs) should be a
function separate from the responsibilities of the secondary market
entities. The requirements for a program to stimulate the supply of
credit to lower income borrowers are not the same as those for the more
general mortgage market. We believe that a connection between these two
goals could be accomplished by either appropriately pricing guarantee
fees to minimize the chance of taxpayer expense, and/or adding a small
supplement to guarantee fees, the proceeds of which could be used by
some other Federal agency in a more targeted fashion in furtherance of
affordable housing goals.
Mortgage Servicing
Credit unions should continue to be afforded the opportunity to
provide mortgage servicing services to their members in a cost-
effective and member-service oriented manner, in order to ensure a
completely integrated mortgage experience for credit union members/
borrowers. To lose this servicing relationship would be detrimental not
only to a vast majority of credit union members/borrowers, but could
also result in fewer mortgage choices available to credit unions and
their members, with higher interest rates and fees being imposed on
both. If national mortgage servicing standards are developed, such
servicing standards should be applied uniformly and not result in the
imposition of any additional or new regulatory burdens upon credit
unions.
Reasonable and Orderly Transition
The transition from the current system to any new housing finance
system must be reasonable and orderly.
S.1217
S.1217 would wind down Fannie Mae and Freddie Mac, and replace the
Federal Housing Finance Agency with a new entity, the Federal Mortgage
Insurance Corporation (FMIC). FMIC would provide insurance on certain
mortgage-backed securities (MBS); this insurance would convey a full-
faith-and-credit of the Federal Government guarantee. FMIC would also
regulate the secondary mortgage market. The legislation would also
cause the creation of a mutual securitization company designed to
assist small lender access to the secondary mortgage market.
CUNA believes the general approach to housing finance reform
embodied in S.1217 to be very well thought out and sound public policy.
S.1217 corrects the fatal design flaws of the previous system, while
maintaining the effective aspects of that system to create a structure
designed to serve borrowers and lenders of all sizes well, preserving a
backup Government guarantee with sufficient protections that risk to
the taxpayer is reduced to nearly zero. However, we do have some
suggested improvements to the law that will be necessary for it to work
for small lenders, and we hope the Committee will take these
suggestions into consideration when crafting a new bill. Before
discussing those modifications, two general points should be covered:
the danger of wringing too much risk out of the system, and the
interplay of mortgage lending regulation from two sources, the Consumer
Financial Protection Bureau (CFPB) and the FMIC.
There are two types of potential errors in designing a robust
housing finance regime. A Type 1 error would allow excessive risk-
taking, making a repeat of the crisis of the last decade likely. A Type
2 error would eliminate too much risk, making housing finance more
expensive and cumbersome than it needs to be, and unnecessarily
excluding too many borrowers from the market. Finding the happy medium
that balances off both errors is of course very difficult. With the
recent crisis still fresh in the memory, there is likely to be an
understandable but unfortunate tendency to minimize Type 1 errors, at
the expense of more Type 2 errors. The specific rules, parameters,
prescribed underwriting criteria, etc., currently considered
appropriate are likely to be more risk-averse than those necessary for
a healthy, robust housing finance system in the long run. Therefore, a
reformed system should have sufficient flexibility to be able to adjust
and fine-tune the rules, norms and procedures as experience is gained.
However, care must be taken not to set in motion a process whereby
additional risks are incrementally added to the point that the system
collapses. This is particularly important given the moral hazard that
comes with any form of Government guarantee. Balancing these pressures
can best be accomplished by not laying down immutable rules, but rather
by establishing institutions that will not be driven by their incentive
structures to exploit the moral hazard of a Government guarantee, and
by empowering an independent regulatory structure with the dual mission
of taxpayer protection and efficient market operation.
The Senate's development of housing finance reform legislation
will, among other things, establish a new and revised regulatory
structure for the mortgage market. This is necessitated by the failure
of the previous regulatory structure. However, this is not the first
time Congress has addressed the regulation of mortgage lending since
the financial crisis. Much of the Dodd-Frank Act requires a plethora of
new consumer protections in mortgage lending, currently being
implemented by the CFPB. Much, although not all, of the rulemaking of
the proposed FMIC will overlap with rules already promulgated by the
CFPB. For example, there are the underwriting standards for a loan to
be eligible to be included in a covered security, and those necessary
for consumers to be protected on an ``ability to repay'' standard. It
is quite possible that the details of those two sets of guidelines
should not be exactly the same. Rather than simply defaulting to the
proposed CFPB standards, the Senate may wish to establish procedures
for the CFPB and the FMIC to coordinate on the future evolution of
shared rules to take account both of consumer protection and effective
mortgage market operation.
Small Lender Access to the Secondary Market
The secondary market must be open to lenders of all sizes on an
equitable basis. Credit unions need to know that as long as they
produce one or more eligible mortgages, they will be able to sell them
to an issuer of Government-backed securities, directly or through an
aggregator, at market prices, for cash, without low-volume penalties,
and with the option to retain servicing on the loans. In addition,
standardization of all steps of the process is very important to credit
unions.
Some form of issuer should be established so that small lenders,
including credit unions, will have unfettered access to the secondary
market. This entity should be independent of any firm that has any
other role or business relationship in the mortgage origination and
securitization process. S.1217 envisions a mutual securitization
company, regulated by the Government guarantor; we believe this would
be an appropriate vehicle to perform that function, provided certain
changes were made with respect to membership, governance, capital, and
powers.
S.1217 would cap membership in the mutual to institutions with less
than $15 billion in assets. We believe that this cap is far too low,
and would suggest that lenders of almost any size should be able to use
the mutual, so long as they do not themselves issue covered securities.
Restricting the mutual to serving just smaller lenders would preclude
achieving necessary scale economies. Indeed, it would be desirable for
the mutual to be among the largest if not the largest issuer of covered
securities.
The mutual should have access to the common securitization platform
being developed under the auspices of the FHFA, and any other relevant
infrastructure of the GSEs as they are wound down. Much of that
infrastructure, including personnel and technology, works very well,
and it would be very inefficient to remove and replace it completely
rather than to transfer it to the new mutual.
The governance structure is also important to the long-term success
of the mutual. We believe the best model would be as a cooperative,
with a board elected to represent all classes of membership, allocated
by type and size of lender, perhaps with regional diversification too.
Board elections should be on a one-member, one-vote basis within
classes. The bylaws of the mutual should stipulate operating principles
and requirements, such as providing access to all qualifying lenders,
regardless of size. Although the operating practices and procedures of
the mutual should be allowed to evolve over time based on management
action and board approval, changes to the basic mission of the mutual,
to provide unfettered access to the secondary market for lenders of all
sizes, which should be expressed in the bylaws, should not be subject
to change in the future.
The mutual will need to have sufficient capital to support a small
balance sheet--enough to hold mortgages from multiple originators
before they can be packaged into securities, and perhaps to hold some
mortgages in the process of modification. While it may be necessary for
mutual members to put up a small amount of capital, the operation of
the mutual securitization company should be funded primarily by per-
transaction fees.
The mutual should be permitted to issue both covered and private
label securities (PLS), with clear disclosure to investors. This will
provide small lenders with an outlet for nonqualified mortgage (QM)
loans. It could also in the long-term reduce the Government's exposure
to the housing finance system by facilitating the provision of purely
private capital. It could also help ensure the availability of credit
to otherwise creditworthy borrowers who may just fall short of meeting
the requirements of a qualified mortgage. To facilitate the issuance of
PLS, all of the standardized processes applied to the creation of
covered securities should also be available for private label
securities. In addition, bond guarantors should be allowed to provide
some coverage for PLS, so long as reserve funds for covered and private
securities are not comingled.
In addition to establishing a mutual securitization company tasked
with ensuring access to the secondary market for small lenders, Federal
Home Loan Banks (FHLBs) should also be eligible to operate as approved
issuers so long as they meet all relevant requirements. This would
provide an option for small lenders. However, the eligibility of FHLBs
to serve as issuers does not reduce the need for a mutual
securitization company.
Government Guarantee
The new system must include consumer access to products that
provide for predictable, affordable mortgage payments to qualified
borrowers. Traditionally this has been provided through fixed-rate
mortgages (such as the 30-year fixed-rate mortgage), and it is
important that qualified borrowers continue to have access to products
that provide for predictable and affordable mortgage payments.
In order to facilitate the continued availability of affordable,
long-term, fixed-rate mortgages for American homeowners, some form of
ultimate Government guarantee should be available for qualifying
mortgage-backed securities. However, the taxpayer must be protected
from the unnecessary exercise of this guarantee by appropriate
standards in mortgage lending, and by layers of sufficient private
capital for loss absorption. The Government guarantee should be the
last, not the first line of defense. We are pleased that S.1217
includes an explicit guarantee.
In addition to an 80-percent maximum loan-to-value for each
mortgage in a covered security (provided by downpayment, private
mortgage insurance, or a combination of the two), sufficient private
capital should be available to absorb the first loss on any mortgage in
a covered security. In theory, this could be accomplished either by a
bond guarantee, a senior-subordinated deal structure or some other
capital market structure. However, in practice, we believe that the
bond guarantor approach would be preferable. During periods of stable
financial markets, a healthy macro economy and strong housing markets,
senior-subordinated deal structures are likely to underprice long-term
risk compared to bond guarantors. During periods of stress, such as the
recent Great Recession, senior-subordinated deals are unlikely to be
available at any price, but bond guarantor coverage would likely be
available, although at a premium price. In addition, a security
structure system would likely favor larger over smaller originators and
issuers because investors would prefer to limit due diligence to a
small number of large institutions.
Another potential advantage of a bond guarantor approach would be
the ability of the FMIC to step in for private bond guarantors in
exigent times, to serve as a countercyclical backstop for the housing
market, rather than simply suspending the requirement for first loss
coverage for arbitrary periods when markets are troubled. If private
bond guarantees were temporarily unavailable, or extremely expensive,
FMIC could sell this coverage to issuers of eligible securities at a
price determined by formula (for example 125 percent or 150 percent of
the average cost of such coverage over the preceding 2 to 5 years).
Once market conditions stabilize, the contract could be sold to a
private bond guarantor. In other words, in stressed markets, rather
than temporarily waiving the requirement for first loss coverage, the
Government should provide, and charge for, such coverage.
The amount of private capital necessary to protect the taxpayer is
of course important. Too little capital places the taxpayer at risk.
Too great a capital requirement unnecessarily raises the cost of
mortgages to borrowers. The appropriate amount depends on: the amount
of capital held by the ultimate Government guarantee fund (FMIC), the
amount of loss on any security that the private capital will be
responsible for (the attachment point), the maximum loan-to-value of
mortgages in covered securities and required underwriting standards for
eligible mortgages. Assuming an attachment point of 10 percent, the
amount of private capital necessary to cover a maximum 10-percent loss
on any covered security will be substantially less than the amount
necessary to cover a maximum 10 percent on all covered securities. \1\
So long as eligible mortgages must have maximum loan-to-value ratios of
80 percent, or private loan-level mortgage insurance and must comply
with the Qualified Mortgage (QM) rule, the likelihood that all covered
mortgage-backed securities would simultaneously suffer losses of at
least 10 percent during anything short of a total economic and
financial collapse (such as the Great Depression of the 1930s) is
negligible. Further, the required amount of capital or reserve funds
should depend on the seasoning of the securities on which a bond
guarantor provides first loss coverage. Older securities should require
lower (not zero) reserve funds.
---------------------------------------------------------------------------
\1\ Whether a bond guarantor's 10-percent first-loss exposure
would apply to just each guaranteed security, or to groups (e.g., a
vintage of securities) would have an effect on the amount of capital
required. We believe the exposure should be limited to single
securities or short vintage windows, for example, for all securities
guaranteed during a quarter rather than a year.
---------------------------------------------------------------------------
For all the reasons just listed, substantially less than 10 percent
of the total exposure of private bond guarantors would be necessary to
provide the 10-percent first-loss coverage. Legislation should require
the 10-percent first-loss coverage, but leave it to the FMIC to
determine the amount of private capital or reserve funds necessary to
provide that 10-percent first-loss coverage under conditions no less
severe than the recent Great Recession.
In the event of the failure of a mortgage in a covered security,
the FMIC should ensure timely payment of principle and interest to
investors in covered securities, and immediately demand payment from
the bond guarantor. The fact that investors could look to the FMIC
rather than a collection of private bond guarantors for payment would
contribute to the homogeneity of covered securities, increasing the
liquidity of the securities. Payment from the bond guarantor to FMIC
would be required so long as total losses on a security (or a defined
group of securities, such as a vintage) had reached 10 percent of the
value of the security. In the event total losses on mortgages in a
security or group exceed 10 percent of the value of the security or
group, the Government backup fund should cover losses in excess of 10
percent.
It is likely that under this arrangement there could actually be
instances when the Government backup fund covered losses on covered
securities without the bond guarantor itself having to fail, i.e., if
one or more but not all of the securities covered by a private bond
guarantor experienced losses of greater than 10 percent, but the
guarantor's capital was not depleted. Indeed, a properly reserved bond
guarantee fund should be able to cover losses up to 10 percent of the
balance of covered securities and still remain in business. In other
words, the payment of losses by FMIC after the 10-percent first-loss
coverage should not require a catastrophic event, i.e., the exhaustion
of a pool of private capital.
A 10-percent attachment point would likely make recourse to the
Government backup fund extremely rare, but not unheard of. A reformed
housing finance system that envisages no payments out of the privately
funded reserve balance of the Government guarantor would be erring on
the side of being too conservative. The goal should be absolute
protection of taxpayers, and that should allow the FMIC to occasionally
operate as a shock absorber, using funds it has collected from market
participants. This would be similar to the way the NCUSIF and the FDIC
pay depositors in failed federally insured credit unions and banks, not
with taxpayer funds, but with reserves paid for by insured
institutions.
The Government should be prohibited from assisting private bond
guarantors. Instead, the Government should be prepared to quickly pay
all legitimate claims not covered by a private bond guarantor, and to
resolve the bond guarantor if the Government is not reimbursed for such
claims in a timely fashion. The Government should also be prepared to
temporarily sell first loss coverage to issuers in times of market
stress, as described elsewhere in this testimony.
The entity that provides the Government guarantee should also have
the regulatory responsibility, as envisioned by S.1217. Since the
entity that provides the Government guarantee will be responsible for
protecting the taxpayer from losses resulting from that guarantee, that
entity must have the authority to establish regulations to ensure that
all of the many players in the complex housing finance system act in a
fashion that does not expose the taxpayer to any losses.
Underwriting Standards
Ultimately, the underwriting standards for a loan to qualify for
inclusion in a covered security should be controlled by the Government
agency responsible for covering losses on such securities: the FMIC. A
similar system has worked fairly well for the FDIC and NCUSIF in
establishing prudential standards for bank and credit union operation.
Therefore, the less explicitly underwriting standards are prescribed in
legislation, the better. Whereas QM standards could serve as a starting
point for FMIC established standards, the law should not explicitly
require that only QM loans could be eligible mortgages. The ability of
a borrower to repay a loan depends on a number of characteristics; not
just the absolute level of each characteristic, but also the interplay
among those characteristics. Many of the underwriting standards of the
QM rule are entirely appropriate for an eligible mortgage:
documentation requirements, payment and debt ratio calculation methods,
etc. But a bright line ceiling of 43 percent on the debt-to-income
ratio, without any ability to consider other factors, would exclude too
many qualified borrowers from enjoying the benefits of FMIC covered
mortgages. For example, consider a borrower applying for an adjustable
rate mortgage with annual adjustments after 1 year, a low downpayment
and a barely prime credit score. For such a borrower, even a 43-percent
debt ratio could be far too high. However, for another borrower
applying for a 30-year fixed-rate loan with a large downpayment, an
active and pristine credit record and other positive characteristics, a
50-percent debt ratio could be completely acceptable.
FMIC should be instructed by Congress to create standards that
facilitate consumer access to mortgage credit consistent with the
overriding goal of minimizing risk to the taxpayer of paying for losses
on covered securities, recognizing that those standards should evolve
through time. Those standards may be similar to QM standards, but
should not be required to be the same as QM standards.
Regulatory Structure
The entities providing secondary market services must be subject to
appropriate regulatory and supervisory oversight to ensure safety and
soundness, for example by ensuring accountability, effective corporate
governance and preventing future fraud; they should also be subjected
to strong capital requirements and have flexibility to operate well and
develop new programs in response to marketplace demands.
The regulator created through any reform of the housing finance
system must have a role centered on supporting securitization that does
not duplicate the role of other regulators in the process. Both issuers
and servicers are heavily regulated by a myriad of Federal agencies,
including the Bureau of Consumer Financial Protection (CFPB),
Department of Housing and Urban Development and Department of
Agriculture, in addition to the supervision performed by prudential
regulators. Credit unions and other small lenders are drowning in
regulation in the mortgage area, and we fear curtailing products and
services as a result. Credit union members, and our housing recovery,
lose as a result of regulatory burden. It is essential that any housing
finance reform not create additional regulatory burden at the
originator or servicer level; in fact, if done properly, the
implementation of a new housing finance system could provide an
opportunity to reduce credit unions' and other small lenders'
regulatory burden, as we discuss later in this testimony.
That said, the secondary market needs strong regulatory oversight
to ensure equal access for small institutions and an orderly
functioning of the system. At a high level, the regulator should be a
neutral third party that would ensure the secondary market is open to
lenders of all sizes on an equitable basis, with equal pricing
regardless of lender volume. Ideally, the regulator would provide
issuers who feel they are not receiving equal treatment in the
secondary market with an administrative process to protest. In turn,
the regulator should have substantial authority to order a remedy,
including banning the secondary market participant from using FMIC.
We envision a regulator in the mold of the National Credit Union
Administration (NCUA) or the Federal Deposit Insurance Corporation
(FDIC), with direct examination and supervisory authority, given that
the full faith and credit of the United States stands behind FMIC
insurance, as it does with NCUA or FDIC insurance. The entities
providing secondary market services must be subject to appropriate
supervisory oversight to ensure safety and soundness, for example by
ensuring accountability, effective corporate governance and preventing
future fraud; they should also be subjected to strong capital
requirements and have flexibility to operate well and develop new
programs in response to marketplace demands. In terms of specific
powers, at a minimum, the regulator should have the authority to make
rules, examine and supervise secondary market participants, suspend or
revoke the power of any secondary market participant to use FMIC, place
any secondary market participant into conservatorship or involuntary
liquidation and study the operation of the secondary mortgage market to
determine if its regulations are leading to the most efficient
operation.
In terms of the regulator's governance structure, we recommend a
board appointed by the President with the advice and consent of the
Senate that would serve for fixed terms of 5 or more years (so as to be
longer than the term of any one President). It is important for credit
unions that, by statute, the board be required to include credit union
representation. The board members should have minimum qualifications
set by statute and come from the private marketplace, not be
representatives of another regulatory agency. We leave it to Congress
to set the minimum criteria for service on the board, but note that a
minimum of 10 years of mortgage lending experience should provide the
operational knowledge necessary to understand issuer concerns.
Staggering terms of service makes sense to ensure continuity of the
board.
The regulator could be funded by a small portion of the guarantee
fee. We believe the regulator should have an Office of Small Lender
Access and Equality, dedicated to the concerns of credit unions and
banks under $15 billion in assets. That office should have the
authority to study the pricing small institutions receive in the
secondary market to determine if small institutions receive fair
pricing.
In terms of the regulatory issues surrounding ``too big to fail''
and the housing regulator's interaction with other regulators, the new
housing regulator should have a seat on Financial Stability Oversight
Council (FSOC) and generally should be given similar authority as the
FDIC and Federal Reserve over systemically important entities under the
Dodd-Frank Act. The regulator should be required to consult with FSOC
before placing a systemically important secondary market participant
into conservatorship. To the extent not already the case under current
law, any nonbank that is a participant in the secondary market should
be subject to a possible systemically important designation, and should
have to draft a ``living will'' if so designated. The new regulator
should have a direct role in reviewing the living wills of any
secondary market participant, as is the case with the FDIC and Federal
Reserve. Where State-chartered entities, including insurance companies,
are concerned, the company would be resolved under State law, but the
Federal housing regulator would have the authority to step in to handle
that resolution if the appropriate State authority did not take what
the regulator deemed to be the necessary action, as is true of the
FDIC's similar authority under the Dodd-Frank Act.
Servicing Standards
Credit unions should continue to be afforded the opportunity to
provide mortgage servicing to their members in a cost-effective and
member-service oriented manner, in order to ensure a completely
integrated mortgage experience for credit union members. To lose this
servicing relationship would be detrimental not only to a vast majority
of credit union members, but could also result in fewer mortgage
choices available to credit unions and their members, with higher
interest rates and fees being imposed on both.
Initial national mortgage servicing standards will likely be part
of the common securitization platform being developed under the
auspices of FHFA. They should be applied uniformly and not result in
the imposition of any additional or new regulatory burdens upon credit
unions. Going forward, private market participants should be able to
revise servicing standards subject to oversight by the FMIC.
The FMIC should have legal authority to ensure that the development
and implementation of all servicing standards are reasonable and fairly
applied for all servicers; the legislation should ensure that
eligibility requirements, compensation to or fees collected from
servicers are not strictly based on volume but also reflect other
reasonable factors such as in the case of compensation, the performance
of the loans serviced.
The mutual securitization company should have the authority to
transfer mortgage servicing rights but FMIC should be empowered to
oversee the process and resolve issues of concern. Tracking of
servicing rights is already provided in the private sector and there is
no need to require the mutual securitization company or the FMIC to
undertake this function.
To ensure that all servicers are treated fairly and appropriately
by the mutual securitization company, the legislation should establish
an ombudsman to interact with servicers and create a review process
under which complaints raised by servicers will be investigated and
resolved in a timely manner.
The regulation of servicing should be bifurcated with the FMIC
overseeing how standards for servicing necessary to support
securitization are developed while the protection of consumers in the
servicing process should be left to the CFPB. In other words, the FMIC
should not be granted authority to impose any additional consumer
protection servicing requirements on regulated financial institutions
that service mortgage loans. Such protections have already been
established under a statutory and regulatory framework under the
purview of the CFPB. While improvements to the current framework, such
as changes to the servicers' exemption levels to ensure regulatory
burdens on smaller servicers are minimized, should be considered, the
regulation and oversight of the servicing process, including standards,
should be left to the CFPB.
Transition Issues
The transition from the current system to any new housing finance
system must be reasonable and orderly. We urge the Committee to allow
for as much time as possible for the mutual to establish itself as a
dominant market participant, for investors to acquire confidence in the
securities issued by the mutual. The transition should end when the new
system is fully functional, rather than after any specified period.
Further, we recommend that the common securitization platform now being
developed under the direction of the FHFA should be available to all
market participants. Finally, once the earnings of the GSEs have fully
paid back all Government costs of their conservatorship, any further
GSE earnings during the transition should be available to cover costs
of standing up the new system, and beginning the funding of the reserve
balance of the FMIC.
Unless the mutual is a dominant player in the market, it runs the
risk of withering. Therefore, we feel strongly that the mutual should
be fully operational before either of the GSEs are shuttered. Indeed,
we expect that much of the infrastructure of the two GSEs will likely
be transferred to both the mutual and FMIC during the transition.
The Federal Credit Union Act limits the types of investments that
credit unions can hold. Since Government agency securities are one of
the few investments allowed, they tend to purchase and hold many of
these securities. Therefore, in order to ensure the safety and
soundness of credit unions, and to ensure the new FMIC securities
perform on par as the current GSE securities we suggest a phased in
approach to issuing the new security that would be blended with the
Fannie and Freddie issued securities to ensure the investments hold
their value and market stability is maintained.
To minimize market disruption, we would suggest that Fannie Mae,
Freddie Mac, and the FMIC be allowed to operate simultaneously so that
all parties can get acquainted with the new system. In addition to
gaining familiarity with the new system, it would be appropriate for
both the GSEs and the FIMC to start issuing securities with each trying
to mirror or have very similar characteristics of the other. As the
last step in the process before Fannie Mae and Freddie Mac are wound
down, blending the two securities together and selling them for a
period of time under the new FIMC name may provide the market the
necessary time to become comfortable with the new security. Ideally,
market participants will not notice any sudden changes on the day that
the GSEs are shuttered and the new system takes over. The many changes
necessary to move from the old to the new system would already have
happened gradually during the transition.
Finally, the common securitization platform now being developed
under the direction of the FHFA should be available to all market
participants. It could be ``owned'' and controlled by the mutual
securitization company, or a separate mutual could make up of all
issuers of covered securities. Its use should be required for all
covered securities, which would likely make it the default for PLS.
Regardless of who owns it, if its use were required for all covered
securities, the FMIC would have de facto regulatory control over it.
Additional Concerns Specific to Credit Unions
Statutory limitations restrict the ability of credit unions to more
fully serve their members and may inhibit their ability to be complete
participants in the reformed housing finance system. Therefore, we
would strongly encourage the Committee to consider the following
statutory changes specific to credit unions as part of the reform of
the housing finance system.
Investment Authority
As noted above, the Section 107(7) of the Federal Credit Union Act
(12 U.S.C. 1757(7)) limits the types of investment that Federal Credit
Unions may make to loans, Government securities, deposits in other
financial institutions, and certain other limited investments. We
believe that credit unions may need additional investment authority in
order to capitalize the mutual envisioned by S.1217, and we encourage
the Committee to provide that authority.
Multifamily Housing
In discussions prior to this hearing, CUNA was asked about the
impact of S.1217 on multifamily housing credit availability and
pricing. Credit unions are not significant participants in the
multifamily mortgage market primarily because of the statutory cap on
business lending imposed in 1998. This cap limits credit unions
business loan portfolio to essentially 12.25 percent of the credit
unions assets. Compounding the matter, the Federal Credit Union Act
considers a loan made on a 1-4 family nonowner occupied residence a
business loan; whereas the same loan made by a bank would be considered
a residential loan. Comprehensive housing finance reform legislation
may provide the opportunity to correct this disparity in the statute.
We encourage the Committee to include language that would amend the
Federal Credit Union Act and consider loans made on 1-4 family
residential properties as residential loans.
Relief From Dodd-Frank Act Mortgage Regulations
As Congress considers comprehensive housing finance reform
legislation, it also may be prudent to consider changes to Dodd-Frank
Act related mortgage regulations. The CFPB has finalized many thousands
of pages of regulations with which credit unions and other community-
based financial institutions must comply, despite the fact that they
did not cause the mortgage crisis and have, throughout history,
employed the strong underwriting principles the rules are designed to
require.
The compliance obligations imposed by these rules--some of which
were finalized in September and are effective in January--are simply
overwhelming to many credit unions, and the tight timeframe for
compliance puts the availability of mortgage credit at risk. While
there has been suggestion by the CFPB and other regulators that they
may not cite financial institutions for noncompliance for a period of
time after the compliance date, the law carries a private right of
action which would make credit unions and others vulnerable to lawsuits
for noncompliance even as they work in good faith toward compliance.
Another year would ensure that mortgage credit remains available to
millions of credit union members while credit unions all over the
country continue to understand how to implement the most sweeping
regulatory changes to mortgage lending in U.S. history, and would be
welcome relief to credit unions. We encourage Congress either through
this legislation or as a separate bill to address this issue.
In addition to addressing the compliance dates of the mortgage
regulations, we encourage the Committee to address several other areas
of the mortgage regulations, including the definition of points and
fees for the purposes of the CFPB's ability-to-repay rule, the credit
risk retention requirements for the ``qualified residential mortgage''
rule and changes to the qualified mortgage rule.
We note that Senator Manchin has introduced S.949, the Consumer
Mortgage Choice Act, which would exclude from the definition ``all
title charges, regardless of whether they are charged by an affiliated
company, provided they are bona fide and reasonable.'' Defining points
and fees in this way will maintain a competitive marketplace, prevent
overpricing or limited choice in low-moderate income areas and allow
consumers to enjoy the existing benefit of working through one entity
for their new mortgage or refinance. A statutory revision would make
this definition clearer and stronger than the CFPB's amended rule.
We hope the Committee will also consider including language in the
housing finance reform bill to repeal the credit risk retention
requirement in the ``qualified residential mortgage'' rule, and to
allow the consumer to waive the requirement that mortgage disclosures
be provided to the consumer three business days before closing.
Finally, we encourage the Committee to consider language to repeal
the defense to foreclosure provision of the Dodd-Frank Act. The
litigation risk created by the defense to foreclosure provision has
caused many credit unions to worry that prudential examiners will
severely restrict the ability of credit unions to keep non-QM loans
that do not enjoy the QM rule's safe harbor in their portfolio after
the rule goes into effect. This would make QM the effective requirement
for safety and soundness and risk mitigation purposes. These changes
would do a great deal to alleviate the very real concern of credit
unions that they will not be able to offer mortgages to their members
who do not meet all of the QM standards but who nevertheless have the
ability to repay a mortgage loan. These changes will also help
facilitate the kind of creative products that are possible through
portfolio lending that individualize the process of getting a mortgage
based on the individual circumstances of each member.
Conclusion
We are encouraged that the Committee has engaged in a process to
consider comprehensive housing finance reform. Unquestionably, the
housing finance system is in need of repair, and it is critical that
Congress get reform legislation right or risk further damage to an
already fragile economy. We appreciate that the Committee has sought
our views on this legislation and look forward to providing continued
assistance as the legislation moves through the process. On behalf of
America's credit unions and their 97 million members, thank you for
your consideration of our views.
______
PREPARED STATEMENT OF BILL COSGROVE
Chief Executive Officer, Union Home Mortgage Corp., and Chairman-Elect,
Mortgage Bankers Association
November 5, 2013
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, my name is Bill Cosgrove and I am a Certified Mortgage
Banker. I currently serve as Chief Executive Officer of Union Home
Mortgage Corp., headquartered in Strongsville, Ohio, and I am the
Chairman-Elect of the Mortgage Bankers Association. \1\ I own and
operate a family owned business, and have been an independent mortgage
banker for 28 years. My company employs 278 individuals, and I am very
proud that since I purchased the company in 1999 we have helped more
than 50,000 homebuyers finance and refinance their homes and achieve
their dreams of home ownership.
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\1\ The Mortgage Bankers Association (MBA) is the national
association representing the real estate finance industry, an industry
that employs more than 280,000 people in virtually every community in
the country. Headquartered in Washington, DC, the association works to
ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand home ownership and extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. Its membership of over 2,200
companies includes all elements of real estate finance: mortgage
companies, mortgage brokers, commercial banks, thrifts, Wall Street
conduits, life insurance companies, and others in the mortgage lending
field. For additional information, visit MBA's Web site: www.mba.org.
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Importance of Small Lenders to the Housing Finance System
Small lenders play a crucial role in the American housing finance
system. More than 7,400 lenders originated mortgages in 2012 according
to the Home Mortgage Disclosure Act (HMDA) data. The vast majority of
these were small lenders with vital ties to their communities.
Fannie Mae and Freddie Mac report that roughly 1,000 lenders are
direct sellers to the GSEs, and Ginnie Mae currently has more than 250
single-family issuers. The vast majority of these loan originators are
smaller independent mortgage bankers and community banks. In fact,
according to the most recent data, while independent mortgage banks
represent only 11 percent of lenders who report under HMDA, this group
originated 40 percent of all purchase money mortgages in 2012. Over the
course of the next year, this group, and small lenders as a whole, will
become increasingly important as we transition from a predominately
refinance market to a primarily purchase market.
It is important to recognize that not all small lenders have the
same needs when it comes to accessing the capital markets for
mortgages. For example, not every smaller lender has the financial
capacity or expertise to directly manage the risks and complexities of
the secondary market. Rather than deal with the GSEs directly, these
small lenders prefer instead to sell whole loans to aggregators. Many
community banks are uncomfortable selling only to aggregators as they
do not want to risk losing other key product relationships with their
customers. And still others, like my company, desire to issue
securities or sell whole loans based on the execution option that
results in the best price for the customer. For most community lenders,
it is critical to have direct access to the secondary market as an
additional tool to ensure competition and an outlet for loans at times
when the aggregators pull back.
Lenders with the skills and the capital should be in a position to
make their own choices about how, when, where, and to whom to sell
their production, based on their core competencies and other strategic
objectives. Unfortunately, current GSE practices today sometimes limit
the choices of otherwise qualified lenders.
Options for the End-State Framework
Under the current GSE model, Fannie Mae and Freddie Mac are the
issuers. They purchase loans from lenders and provide a guarantee
(backed by an implicit Government guarantee).
Under the Ginnie Mae model, lenders are the issuers. Lenders obtain
loan-level insurance from a Government program (FHA, VA, USDA) and then
issue the securities, obtaining a security-level guarantee from Ginnie
Mae.
The GSE model provides for many, typically smaller, lenders to sell
whole loans to Fannie Mae and Freddie Mac for cash. This provides quick
funding, which is a valuable benefit for many smaller lenders.
The Ginnie Mae approach puts greater responsibility and control
with the lender. However, the operational complexities may prevent some
smaller lenders from becoming issuers. As a reference, there are
roughly 400 Ginnie Mae issuers, and over 1,000 direct sellers to Fannie
and Freddie.
It is important to note that both options can be made to work well
for smaller, community-based lenders, provided policy makers address
the issues outlined below.
Making the Secondary Market Work Better for Smaller Lenders
In the past few years, as the mortgage market has begun stabilize,
more small lenders have chosen to diversify their secondary market
options by selling directly to the GSEs, and retaining the servicing on
the loans they originate. This has been a healthy trend, and an early
sign that the market has begun to deconsolidate. The GSEs have already
substantially increased their qualification standards in the postcrisis
period for lenders with respect to minimum net worth requirements. It
is important to note that further increases in net worth standards for
small lenders would block direct access to the secondary market for
critically important community lenders.
As policy makers consider both transitional and end-state reforms,
the future secondary market needs to provide direct access, on
competitive terms, for those lenders who can take on the requisite
responsibilities. In particular, smaller lenders need a secondary
market that delivers:
Price certainty, including guarantee fees that reflect the
risk of the underlying loan (and not the loan volume or the
asset size of the lender);
Execution for both servicing-retained and servicing-
released loans;
Single loan and/or small pool executions with a low minimum
pool size;
Ease of delivery;
Quick funding.
Fannie Mae's and Freddie Mac's cash windows provide some, though
not all, of these aspects today. While Ginnie Mae provides a means of
securitizing single loans, the relative complexity of the process has
kept many smaller originators from becoming direct issuers, thus the
smaller number of Ginnie issuers relative to GSE direct sellers.
Price Certainty and Transparency
One major ongoing concern has been the pricing advantages (e.g.,
lower guarantee fees) and other preferences received by some lenders.
These disparities contributed significantly to the consolidation of the
lending market during the run-up to the financial crisis and in its
aftermath. Although the FHFA has reported that these disparities have
narrowed, there is little transparency on pricing and pricing
concessions offered to certain lenders, despite the fact the
enterprises are in their fifth year of conservatorship. Historically,
certain lenders also received negotiated underwriting variances as
well, which gave them additional competitive advantages.
MBA believes that FHFA should expedite efforts to eliminate any
remaining pricing and underwriting concessions. In addition, end-state
reforms should also ensure that the federally supported secondary
market provides transparent pricing, programs and underwriting
standards. Guarantee fees should reflect the risks of the underlying
loans, and should not differ across qualified originators, except to
reflect objective measures of counterparty risk. Access to programs and
products should be made broadly available to all lenders that meet
minimum standards, and any additional requirements needed to mitigate
counterparty risk should be based on objective and transparent factors
so that smaller lenders have a clear path to participate.
Pricing in the federally supported secondary market should be more
transparent and calibrated to objective measures of loan-level and
counterparty risk.
Execution Options for Smaller Lenders
Because of the risks associated with the GSEs' large retained
portfolios, most proposals regarding the future of the federally backed
secondary mortgage market do not envision the successors to the GSEs
having large investment portfolios of mortgages. Today, the GSE cash
windows provide lenders of all sizes a bid for whole loans. While this
bid may not always be the best execution available in the market, it is
open every business day, provides quick funding for lenders, and is
relatively simple in terms of operational process. MBA believes
secondary market reform needs to ensure that any successors to the GSEs
retain small portfolios necessary to operate a cash window and
aggregate multilender securities.
Some lenders who have achieved additional scale and sophistication
want to pool and securitize their loans themselves in order to get a
better ``all-in'' price. Beyond selling to the cash window, there are
existing means for lenders to deliver small lots into multilender
pools. The Ginnie II and the Fannie Majors programs both allow single
loan execution.
However, these programs are more complex than using the cash
windows, and thus only a small number of lenders utilize the programs.
There is a need for simplification of these processes to make them more
user-friendly for smaller lenders. For example, although multilender
securities might not price as well in the capital markets as larger
pools from a single lender, any discount could be reduced by pooling
practices that increase the size of these multilender securities.
In addition, it is important for some smaller lenders that they
have the option to securitize loans on either a servicing-released or
retained basis. Currently, Fannie Mae and Freddie Mac have programs in
place which facilitate bifurcation of originator and seller reps and
warrants so that originators can deliver loans servicing-released.
However, participation in these programs is tightly restricted. Such
programs are necessary going forward, and should be made more broadly
available to smaller lenders. MBA believes these programs do not need
direct facilitation from any other player and that smaller sellers
should be able to negotiate reps and warrants directly with any
approved servicer.
Quick Funding
It is also important for smaller originators to have an option for
receiving quicker funding. In the new system, there should be some
consideration to moving to more frequent settlement dates to permit
quicker funding. Broker dealers already provide a bid for off-
settlement-date trades using interpolated pricing. The expectation is
that this market could grow if more sellers utilize it. Direct sellers
to the GSEs or issuers in the Ginnie Mae program must meet financial
and managerial standards to be approved today. Smaller lenders who wish
to be direct issuers will need to meet the issuer standards (net worth
and other standards) set by the public guarantor in a future model.
These standards need to be set at a level that allows for meaningful
access by smaller lenders.
Key GSE Assets Should Be Preserved To Assist Small Lenders in a New
System
As Congress considers broader reforms to the secondary market, care
must be taken to ensure a smooth transition, and that ``switching
costs'' to a new system do not create a major barrier to participation
by smaller lenders. Key GSE assets, including technology, systems,
data, and people, should be preserved and redeployed as part of any
transition associated with GSE reform. For example, certain assets
could be moved into the Common Securitization Platform. Other assets
could be made broadly available through a public leasing program, or
sold/auctioned with conditions that ensure access to all market
participants.
In addition to the infrastructure assets, the following functions
and support services should be retained in any new system:
A. Cash Window/Whole loan execution;
B. Multilender security execution;
C. Single-loan securitization;
D. Servicing retained sales; and,
E. Servicing released sales.
In addition, single-family lenders should be able to utilize
familiar credit enhancement options, such as mortgage insurance, to
facilitate secondary market transactions in a timely and orderly way.
Key credit enhancement functions present in today's secondary market
system should be preserved and improved, while allowing new forms of
private credit enhancement to develop over time.
It may well take a combination of approaches to ensure that the
system works for both smaller and larger lenders. It is imperative that
the new system provide access on a competitive basis to qualified
institutions, as this vibrant competition will ultimately benefit
borrowers.
Role of FHLBs in a New System
Congress should give serious consideration to expanding Federal
Home Loan Bank membership eligibility to include access for
nondepository mortgage lenders. In fact, historical evidence shows that
such a move is consistent with the original intent of the system. \2\
These lenders are often smaller, community-based mortgage bankers or
servicers focused on providing mainstream mortgage products and
services to consumers. They are a critically important source of
mortgage credit, especially for purchase market--the Fed's recent HMDA
report shows that independent mortgage bankers accounted for 40 percent
of home purchase lending in 2012.
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\2\ Professor Snowden notes that ``Hoover had envisioned a Federal
Home Loan Bank that would serve all institutional residential mortgage
lenders, including commercial and savings banks, insurance companies,
and mortgage companies. The USBLL did not however, and, in the end,
Hoover's reliance on that organization limited the breadth and
effectiveness of the FHLB system during the 1930s.''
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The Federal Home Loan Banks have had an important role in providing
long-term funding for institutions that hold mortgage loans on their
balance sheets. In the future system, this role could be expanded to
include shorter-term financing for the aggregation of pools of mortgage
prior to securitization. This financing would become even more
critically important if the end-state reform does not preserve a cash
window option, but only if membership criteria for the FHLBs were
expanded to include community lenders of a variety of business models,
including independent mortgage bankers.
In exchange for membership in the FHLB system, these institutions
could be required to hold a limited class of stock with appropriate
restrictions. Expanding FHLB access to these institutions would enhance
market liquidity and ensure a broader range of mortgage options for
consumers, and improve the execution options for FHLB members as a
whole.
Creation of a Mutual Organization
S.1217 proposes a system that is closer in many respects to the
Ginnie Mae model. Lenders are issuers, and are responsible for
obtaining private credit enhancement before delivering pools of loans
to the central securitization platform for the Government guaranty.
This approach may work for some lenders, but may be too operationally
difficult for many smaller lenders. S.1217 provides an alternative for
smaller lenders in the form of a mutual securitization company, a
cooperative that takes the role of aggregator and issuer. S.1217 also
provides for the FHLB system to be aggregators for smaller lenders.
The mutual could potentially fill the aggregation role for those
lenders who do not have the operational capacity or desire to be an
issuer. However, if Congress establishes appropriate parameters around
capital requirements and credit standards and takes the proper steps to
ensure small lender access throughout the core reforms, such as the
execution options noted above, transparent pricing, and product access,
a mutual structure may not be necessary. Regardless, broad standards
for a mutual should ensure a fair governance process that does not
advantage one class of mutual shareholders over another based on size
or loan volume.
Questions arise regarding the economic model for the mutual. First,
it appears that the mutual is likely a private, not a Government
organization. As such, its cost of financing may be high. Without a
favorable cost of funds, it is not clear whether the aggregation
business could be run profitably and safely. Second, lenders working
with the mutual would likely be required to maintain an equity stake in
the cooperative. This represents an ongoing liability that would likely
be difficult to liquidate if the lender needed funds. Certain mutuals
provide for capital stock to be sold back at a par value, but this then
increases risk for the mutual. In structuring any mutual entity
intended for smaller lenders, it is important to ensure that it is not
an inferior execution option that limits small lender competitiveness.
Finally, there are questions regarding membership criteria for the
mutual. If this channel of execution is optimal, it should be open to
all lenders in order to maintain a level playing field. In fact, there
should be provision for the creation of additional issuer entities that
could compete along various dimensions.
Transition to a New System
Transition to a new housing finance system should occur in a manner
that avoids disrupting the market. Preserving the execution options for
small lenders will be critical to a smooth transition. Extended phase-
in periods will be necessary, and the new regulator should have some
discretion and flexibility to extend those phase-ins if necessary to
ensure a smooth transition.Standardized securities and transparent
underwriting and guarantee fee pricing based on the risk of the
mortgages, and not the volume or asset size of the selling institution,
will ensure that smaller lenders have access to the federally supported
segment of the secondary market.
As policy makers begin moving the market toward the desired end
state for Fannie Mae and Freddie Mac--either through regulatory,
administrative, or legislative actions--two items need particular
attention.
First, the GSEs' current cash window needs to remain in place until
the new secondary market delivery systems are fully operational. As the
GSE portfolios wind down, sufficient balance sheet space needs to be
maintained to aggregate loans from smaller lenders who are not yet
ready to securitize. As noted, the new system must also have fully
viable small lender execution options before winding down the existing
cash window.
Second, the FHFA platform initiative needs to include plans for the
acceptance of small lot deliveries into multilender pools, perhaps
initially designed as an expansion of the Fannie Majors program. Every
effort should be made to further simplify this program so that it can
be a viable, competitive option for lenders of every size.
Rural Concerns
Small lenders--community banks, credit unions, and independent
mortgage bankers--provide a critical link to rural communities.
Maintaining access to the system in rural markets can be accomplished
through the broader efforts to ensure small, community lender access to
the new system. The use of percentage of business goals is too rigid,
could lead to inappropriate risk assessment and would be subject to
``counting'' games that undermine their objectives and should not be
used in the new system.
S.1217 clearly addresses many of the concerns of smaller lenders
with respect to maintaining direct access to the secondary market on a
competitive basis. S.1217 could be enhanced by requiring the new
private credit enhancers to ensure small lender access through:
a cash window for aggregation (not investment),
additional small lender execution options like single loan
and multilender pooling options, and
requiring fair, transparent pricing and access for all
lenders.
Care must also be taken with respect to certain issues,
particularly around transition, to ensure that key assets of the GSE
model are redeployed to the new system, ensuring liquidity, access, and
a level playing field for lenders of all sizes.
Conclusion
Making the secondary market work for smaller lenders is critical
for providing a competitive market, which ultimately benefits
homebuyers. We are encouraged by the recent work undertaken by this
Committee to tackle the complexities of housing finance reform, and
urge you to ensure that secondary market reform provides smaller
lenders with opportunities for direct access.
Thank you again for the opportunity to testify today, and for the
chance to continue this critical dialogue with the Members of this
Committee. I look forward to any questions you may have.
______
PREPARED STATEMENT OF JOHN HARWELL
Associate Vice President of Risk Management, Apple Federal Credit
Union, Fairfax, Virginia, on behalf of the National Association of
Federal Credit Unions
November 5, 2013
Good morning, Chairman Johnson, Ranking Member Crapo, and Members
of the Committee. My name is John Harwell, and I am testifying today on
behalf of the National Association of Federal Credit Unions (NAFCU). I
appreciate the opportunity to share NAFCU's views with the Committee
on, ``Housing Finance Reform: Protecting Small Lender Access to the
Secondary Mortgage Market''. NAFCU appreciates the bipartisan approach
Committee leadership and Members have demonstrated on this critical
issue. In addition to our testimony, NAFCU member credit unions look
forward to continuing to work with you beyond today's hearing to ensure
access to the secondary mortgage market for credit unions and their 96
million members.
Throughout my career in financial services I have had a deep focus
on home loans and have an understanding of credit union mortgage
lending from a number of perspectives. I currently serve as the
associate vice president of Risk Management at Apple Federal Credit
Union (Apple FCU) in Fairfax, Virginia. Before joining the management
team at Apple FCU, I was with FedChoice FCU and served in a number of
capacities culminating in Membership Services Manager. Over the years,
I have been involved in the mortgage lending process as a loan officer,
branch manager, compliance officer and risk manager. In addition to my
responsibilities at Apple FCU, I currently serve on the Board of
Directors of the Metropolitan Area Credit Union Managers Association
dedicated to continuing education for credit union personnel from
executives to board volunteers.
Headquartered in Fairfax, Virginia, Apple FCU serves more than
161,000 members with assets totaling over $1.8 billion. With 21
branches across northern Virginia, Apple FCU provides diversified
financial services including mortgage origination and servicing.
Financial education is very important to Apple FCU, and we are known
for our student-run credit union branches in Fairfax County schools
where we are able to reach young people and teach them the importance
of personal finance.
As you know, NAFCU is the only national organization exclusively
representing the interests of the Nation's federally chartered credit
unions. NAFCU-member credit unions collectively account for
approximately 68 percent of the assets of all federally chartered
credit unions. NAFCU and the entire credit union community appreciate
the opportunity to participate in this discussion regarding housing
finance reform. My testimony today will explore the longstanding vital
relationships credit unions have with the Government sponsored
enterprises (GSEs) and how important it is for any housing finance
reform package to ensure credit union access to the secondary market
under fair pricing conditions. Key issues in the housing finance reform
debate for credit unions include:
An explicit Government guarantee on mortgage-backed
securities (MBS)
Fair pricing and fee structures that reward loan quality
Ensuring market feasibility of a mutual should such an
entity be adopted in statute
Flexible underwriting standards that will allow credit
unions to best serve their members
Adequate transition time to a new housing finance model
Background on Credit Unions and Credit Union Mortgage Lending
Historically, credit unions have served a unique function in the
delivery of necessary financial services to Americans. Established by
an act of Congress in 1934, the Federal credit union system was
created, and has been recognized, as a way to promote thrift and to
make financial services available to all Americans, many of whom would
otherwise have limited access to financial services. Congress
established credit unions as an alternative to banks and to meet a
precise public need--a niche credit unions fill today for over 96
million Americans. Every credit union is a cooperative institution
organized ``for the purpose of promoting thrift among its members and
creating a source of credit for provident or productive purposes.'' (12
U.S.C. 1752(1)). While nearly 80 years have passed since the Federal
Credit Union Act (FCUA) was signed into law, two fundamental principles
regarding the operation of credit unions remain every bit as important
today as in 1934:
credit unions remain totally committed to providing their
members with efficient, low-cost, personal financial service;
and,
credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism. Credit unions are
not banks.
The Nation's approximately 6,700 federally insured credit unions
serve a different purpose and have a fundamentally different structure
than banks. Credit unions exist solely for the purpose of providing
financial services to their members, while banks aim to make a profit
for a limited number of shareholders. As owners of cooperative
financial institutions united by a common bond, all credit union
members have an equal say in the operation of their credit union--``one
member, one vote''--regardless of the dollar amount they have on
account. These singular rights extend all the way from making basic
operating decisions to electing the board of directors--something
unheard of among for-profit, stock-owned banks. Unlike their
counterparts at banks and thrifts, Federal credit union directors
generally serve without remuneration--a fact epitomizing the true
``volunteer spirit'' permeating the credit union community.
Credit unions continue to play a very important role in the lives
of millions of Americans from all walks of life. As consolidation of
the commercial banking sector has progressed, with the resulting
depersonalization in the delivery of financial services by banks, the
emphasis in consumers' minds has begun to shift not only to services
provided, but also--more importantly--to quality and cost of those
services. Credit unions are second-to-none in providing their members
with quality personal financial services at the lowest possible cost.
As has been noted by Members of Congress across the political
spectrum, credit unions were not the cause of the recent economic
crisis, and examination of their lending data indicates that credit
union mortgage lending has outperformed bank mortgage lending during
the recent downturn. This is due in part to the fact that credit unions
were not the cause of the proliferation of subprime loans, instead
focusing on placing their members in solid products they could afford.
While the housing market continues to recover from the financial
crisis, and Congress works to put into place safeguards to ensure such
a crisis never happens again, credit unions continue to be focused on
providing their member-owners with the basic financial products they
need and demand. The graphs below highlight how credit union real
estate loan growth outpaced banks during the downturn, and how credit
unions have fared better with respect to real estate delinquencies and
real estate charge-offs. The fourth graph demonstrates how credit
unions are holding more long-term real estate loans as a percentage of
total real estate loans than banks. It is with this data in mind that
NAFCU urges members of the Committee to recognize the historical
performance and high quality of credit union loans as housing finance
reform moves forward.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As Committee discussions on this topic continue, a primary concern
of credit unions is continued unfettered access to the secondary
mortgage market including adequate transition time to a new system
should lawmakers see such a change necessary. A second concern, equally
as important, is recognizing the quality of credit union loans through
a fair pricing structure. Because credit unions originate a relatively
few number of loans compared to others in the marketplace--federally
insured credit unions had about 7 percent of the first mortgage
originations in 2012 (see chart below)--they cannot support a pricing
structure based on loan volume, institution asset size, or any other
geopolitical issue that will lend itself to discrimination and
disadvantage their member-owners.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Recent trends in asset portfolios, coupled with the current
interest rate environment, present a unique challenge to credit union
management. In the past few years, interest rates have fallen to record
lows, credit unions have experienced vigorous share growth and credit
union participation in the mortgage lending arena has increased to
historic heights. Credit union mortgage originations more than doubled
between 2007 and 2013, and the credit union share of first mortgage
originations expanded from 2.5 to about 7 percent. The portion of first
mortgage originations sold into the secondary market also more than
doubled over that same period, from 25.7 percent in 2007 to 53.6
percent in 2012, according to National Credit Union Administration
(NCUA) call report data (see chart below).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
While credit unions hedge against interest rate risk in a number of
ways, selling products for securitization on the secondary market
remains a key component of safety and soundness. Lenders must have
continued and unfettered access to secondary market sources including
Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks
(FHLBs) as they are valuable partners for credit unions who seek to
hedge interest rate risks by selling their fixed-rate mortgages to them
on the secondary market. Not only does this allow credit unions to
better manage risk, but they are also able to reinvest those funds into
their membership by offering new loan products or additional forms of
financial services. A 2012 NAFCU real estate survey highlights the
growing use of GSEs among credit unions. More than three-quarters of
respondents indicated that credit union board policy restricted the
percentage of real estate loans that could be held on their balance
sheet, with a median limitation of 35 percent. Without these critical
relationships credit unions would be unable to provide the services and
financial products their memberships demand and expect.
Home Mortgage Disclosure Act data shows how heavily credit unions
have come to rely on the GSEs. Between 2007 and 2012, the portion of
credit union first mortgages that were sold to Fannie Mae grew from 28
percent to 53 percent. The portion sold to Freddie Mac remained a
constant 14 percent over the same period. Credit unions sold a total of
67 percent of their first mortgages to the GSEs in 2012. The total
market for mortgage resales is also heavily dependent on the GSEs. The
portion sold to Fannie Mae and Freddie Mac in 2007 was 43 percent in
2007 and 53 percent in 2012.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Finally, it should also be noted that the Government plays an
important role in helping to set standards and bring conformity to the
housing market. Changing standards to eliminate or make conformity
difficult could make it harder for credit unions to sell loans onto the
secondary market as they do not have the economies of scale larger
market participants enjoy.
Key Credit Union Concerns in Housing Finance Reform Efforts
In 2010, as the future of housing finance became a focal point in
Congress, with the Administration, and among the regulatory agencies,
the NAFCU Board of Directors established a set of principles that the
association would like to see reflected in any reform efforts. The aim
of these principles (listed below) is to help ensure that credit unions
are treated fairly during any housing finance reform process.
NAFCU believes a healthy, sustainable and viable secondary
mortgage market must be maintained. Credit unions must have
unfettered, legislatively guaranteed access to such a market.
In addition, in order to achieve a healthy, sustainable and
viable secondary market, NAFCU believes there must be healthy
competition among and between market participants in every
aspect of the secondary market. Market participants should
include, at a minimum, multiple Government Sponsored
Enterprises (GSEs), Federal Home Loan Banks, Ginnie Mae (as
insurer of FHA, VA, and other Government-backed loans), and
private entities.
The U.S. Government should issue explicit guarantees on the
payment of principal and interest on MBSs. The explicit
guarantee will provide certainty to the market, especially for
investors who will need to be enticed to invest in the MBSs and
facilitate the flow of liquidity.
During any transition to a new system (whether or not
current GSEs are to be part of it) credit unions must have
uninterrupted access to the GSEs, and in turn, the secondary
market.
Credit unions could support a model for the GSEs that is
consistent with a cooperative or a mutual entities model. Each
GSE would have an elected Board of Directors, be regulated by
the Federal Housing Finance Agency, and be required to meet
strong capital standards.
A board of advisors made up of representatives from the
mortgage lending industry should be formed to advise the FHFA
regarding GSEs. Credit unions should be represented in such a
body.
While a central role for the U.S. Government in the
secondary mortgage market is pivotal, the GSEs should be self-
funded, without any dedicated Government appropriations. GSE's
fee structures should, in addition to size and volume, place
increased emphasis on quality of loans and risk-based pricing
for loan purchases should reflect that quality difference.
Credit union loans provide the high quality necessary to
improve the salability of many agency securities.
Fannie Mae and Freddie Mac should continue to function,
whether in or out of conservatorship, and honor the guarantees
of the agencies at least until such time as necessary to repay
their current Government debts.
NAFCU does not support full privatization of the GSEs at
this time because of serious concerns that small community-
based financial institutions could be shut-out from the
secondary market.
The Federal Home Loan Banks (FHLBs) serve an important
function in the mortgage market as they provide their credit
union members with a reliable source of funding and liquidity.
Reform of the Nation's housing finance system must take into
account the consequence of any legislation on the health and
reliability of the FHLBs.
Mortgage Lending at Apple FCU
Apple FCU currently has over 3,150 loans and $720 million in total
mortgage loan originations outstanding. About a third of our loans are
sold on the secondary market to Freddie Mac. Apple FCU has maintained
the servicing on those loans, as it is important to us to keep that
interaction with our members. The 30-year fixed-rate mortgage is an
important product to our membership and is a close second to the 15-
year fixed-rate in being our most common type of first trust. We
currently hold over 600 30-year fixed-rate mortgages in portfolio. Any
change to housing finance should be done in a way that helps preserve
this product for credit union members in the marketplace.
NAFCU's Perspective on Emerging Senate Debate
NAFCU applauds Chairman Tim Johnson and Ranking Member Mike Crapo
for their work in addressing solvency of the Federal Housing
Administration earlier this year, and their continued bipartisan
attention to housing policy as the Banking Committee agenda
aggressively pursues housing finance reform ideas from the perspective
of all stakeholders. We would also like to recognize the work of
Senators Mark Warner and Bob Corker, and the Members of this Committee
who have cosponsored their legislation, for laying the foundation for
housing finance reform with the introduction of the ``Housing Finance
Reform and Taxpayer Protection Act of 2013'' (S.1217). As you know,
this legislation has the support of several Committee Members and
provides for an explicit Government guarantee on qualifying mortgage-
backed securities in a reformed secondary market.
The Importance of Maintaining a Government Guarantee
NAFCU and its member credit unions have examined various proposals
for reform of the housing finance system and have reached the
conclusion that we cannot support any approach that does not maintain
an explicit Government guarantee of payment of principal and interests
on mortgage-backed securities (MBS). The explicit guarantee will
provide certainty to the market, especially for investors who will need
to be enticed to invest in the MBS and facilitate the flow of liquidity
in times of economic uncertainty. We think the approach found in S.1217
where private capital stands in front of the guarantee is workable, and
believe this type of approach offers a viable public-private solution.
Key Elements of the Current System
Fannie Mae and Freddie Mac play important roles in the ability of
credit unions to offer mortgage loans to their membership. A major part
of this comes from the ease of transaction credit unions currently
experience when using software provided by Fannie Mae and Freddie Mac.
At Apple FCU, we underwrite to Freddie Mac guidelines using their
Loan Prospector program. The Loan Prospector program is used for all
mortgage loans including jumbo loans. Our Lending operating system is
called MortgageBot. Mortgage lenders and investors make a lending
decision by looking at some basic factors: a person's capacity to repay
a loan, a person's credit experience, the value of the property being
financed, and the type of mortgage. Freddie Mac's Loan Prospector
program dramatically speeds up the mortgage lending process and reduces
the cost of getting a mortgage by using statistical computer models
based on traditional underwriting factors. Loan Prospector never uses
factors such as a borrower's race, ethnicity, age, or any other factor
prohibited by the Nation's fair housing laws. This type of digital
underwriting and standardization makes the entire process user friendly
must be maintained in any new system.
While digital underwriting and standardization provide for ease of
transaction, it should be noted that becoming an approved lender
through Freddie Mac is not an easy process. While NAFCU understands and
supports thorough requirements to ensure unscrupulous lenders are kept
out of the marketplace, lawmakers must recognize the considerable
amount of time it can take to become an approved lender at the various
GSEs and account for such time in a transition to any new system.
Furthermore, even though Apple FCU is not currently using it, the
function of the cash window at the GSEs as a single loan execution
process is also vital to credit unions moving forward.
S.1217 and the Creation of the New Federal Mortgage Insurance
Corporation
As the Committee is aware, S.1217 would replace the Federal Housing
Finance Agency (FHFA) with a new Federal Mortgage Insurance Corporation
(FMIC). The legislation also establishes a new statutory conforming
loan limit of $417,000 for a single family residence. NAFCU has
concerns about the impact this could have on the availability of loans
in high-cost areas. NAFCU asks the Committee to consider if it is best
to have the conforming loan limit defined in statute, or could it be
better served by being evaluated and established by the regulator?
Any number of governance models could be sufficient should the new
Federal Mortgage Insurance Company (FMIC) envisioned in S.1217 become a
reality. If there is a single director at the FMIC, NAFCU believes
there should an advisory board with at least one dedicated credit union
representative. If the FMIC is governed by a board, there should be at
least one credit union representative on the board. It should be noted
that prior to the financial crisis, credit unions didn't always have an
equal voice at the GSEs (due to limited volume) to assure pricing from
the GSEs that reflected the quality of credit union loans. The changes
that occurred during the crisis helped mitigate this concern, and we
hope that continues under a new system.
While NAFCU appreciates the recognition of ``community based
financial institutions'' in statute, it's imperative that legislative
text is explicit in requiring robust experience specifically in the
credit union space.
Funding of the FMIC should be done in a way as to limit the cost to
financial institutions as much as possible. NAFCU believes it would be
important to have an office at the new regulator with a dedicated focus
and expertise on the needs of community institutions such as credit
unions. In its reports to Congress, NAFCU supports credit union
specific language on how the FMIC has provided liquidity, transparency,
and access to mortgage credit in support of a robust secondary mortgage
market and production of RMBS. As the FMIC establishes a fee structure,
small financial institutions appreciate the clarification in statute
that fees established by the FMIC should be ``uniform'' and can't be
based on ``volume to be purchased by an issuer.'' NAFCU believes it is
critical to have a fee schedule that rewards loan quality, and we would
support going further to expressly state this in the bill.
The FMIC would also have the ability to approve issuers. NAFCU
would support clarification in statute that credit unions can
securitize loans. While the NCUA is considering regulations in this
regard, statutory clarification could help clear up any ambiguity.
S.1217 and the Proposed Mutual Securitization Company
In the context of S.1217, NAFCU believes the concept in Sec. 215 of
the legislation that establishes the FMIC Mutual Securitization Company
is a workable solution. It is important that such an entity would help
ensure that there is guaranteed access to the secondary market at all
times for all credit unions. As noted above, while the NCUA is
contemplating giving credit unions the ability to securitize mortgages,
such authority does not currently exist. Therefore, the functions that
the mutual would perform are especially vital to credit unions, as well
as community banks and other small lenders, to help ensure access to
the secondary market. We applaud the supporters of S.1217 for including
this key element, especially Senators Jon Tester and Mike Johanns for
their leadership in this area.
While NAFCU believes that the mutual is a viable option, there are
ways that it can be improved. NAFCU has concerns about the $15 billion
cap for participation in the mutual that exists in S.1217 as entities
below this arbitrary asset size threshold will be unable to generate
enough volume to ensure liquidity. NAFCU has suggested that, if there
is a cap, it should be much higher (no less than $250 billion) to give
most regional banks the opportunity to participate and generate the
volume needed for the mutual to be successful.
In terms of an approval process for entities to participate in the
mutual, standards could be set out by the new mutual board of
directors, which should be elected by the membership. The board should
include credit union representation (including at least one Federal
credit union representative) that is proportionately equal to other
industry representatives on the board. Furthermore, since the mutual
would be the guaranteed route to access the secondary market for small
lenders, especially in difficult times, it is important that there be a
streamlined process to become a member. Conversely, we also believe it
should not be made too difficult for an entity to leave the mutual
should they desire.
Credit unions did not cause the financial crisis, and NAFCU
believes that historical mortgage lending data should be taken into
account as the secondary mortgage market is reformed. NAFCU believes
that fee structures associated with the mutual, whether it is to
capitalize or to sustain the mutual over time, should be based on loan
quality as opposed to the volume of loans an entity is able to
generate. If politically feasible, Congress should consider the mutual
having some type of Government seed money that will help the mutual get
off the ground and encourage qualifying entities to participate from
day one. Such funds could be paid back over a period of years from the
profits of the mutual.
NAFCU believes it would be viable to have the mutual be governed by
the new Federal Mortgage Insurance Corporation (FMIC) as outlined in
S.1217. It should be noted NAFCU believes the mutual's board of
directors should be empowered to make day-to-day operating decisions
and that it should be self-regulated to the greatest extent possible.
Finally, the new mutual will likely need technology and/or other
infrastructure from the current GSEs to begin operations. NAFCU
believes that sale of technology to the mutual should be done at the
most reasonable price possible. The pricing and sale of technology will
have a direct impact on the costs necessary to capitalize the mutual.
The Role of Federal Home Loan Banks (FHLBs) in S.1217
The Federal Home Loan Banks serve an important function in the
mortgage market as they provide their credit union members with a
reliable source of funding and liquidity. Reform of the Nation's
housing finance system must take into account the consequence of any
legislation on the health and reliability of credit unions.
NAFCU supports the FHLBs being one option for credit union access
to the secondary mortgage market as proposed in S.1217. Currently,
about 17 percent of credit unions belong to their regional FHLB.
Whether or not a credit union would use their FHLB membership as a
primary channel to access the secondary market would be subject to many
factors, including the current relationship between the credit union
and their FHLB. Because the extent to which credit unions that are a
member of their FHLB utilize current services varies greatly, we would
expect the same should FHLBs become issuers in a new housing finance
system. While NAFCU is supportive of the idea, we believe this cannot
be the only mechanism in place for credit unions to gain access to the
secondary market. Other options such as the proposed mutual and private
placement must be available to credit unions as well. Having multiple
options will allow credit unions to choose the avenue that works best
for them and help ensure a healthy competition for their loans, which
can help with fair pricing.
Transition to a New Housing Finance System
Should Congress act to reform the Nation's housing finance system,
getting the transition right will be critical. More than anything, to
ensure a smooth transition to a reformed secondary mortgage market,
credit unions need certainty that changes outlined in legislation and
accompanying regulation will function as intended. Credit unions must
be kept up-to-date during this transitional period and lawmakers should
build flexibility into the transitional period to account for
unforeseen implementation challenges. NAFCU believes that Congress
should first agree on a set of reforms and then, based on the nature
and complexity of such reforms, establish a timeframe for transition.
Arbitrarily pledging to adhere to a transitional timeframe before a set
of reforms are agreed upon could create otherwise avoidable issues for
new entities created under the bill and outside stakeholders.
In an effort to ease the transition, Congress should consider
moving currently approved Fannie and Freddie lenders into a new system
en bloc and giving them an expedited certification. This could reduce
confusion and, if executed properly, could make the process run more
smoothly for all involved. It can take time for lenders to be certified
with the GSEs, and this time to certify, whether to the GSEs or to a
new system, should be factored in to the transition time.
NAFCU also believes it is important that a new system be up and
running before the ability of Fannie Mae and Freddie Mac to guarantee
MBS is shut down. One way to accomplish this may be to have the two
entities exist in a winding down capacity during the first 6 months of
a new system. For example, they could still collect mortgages from
lenders and move them through a new mutual to test the process. Lenders
could use them and/or transition to the mutual or other options during
this timeframe to allow for a smooth transition.
The Importance of Servicing Rights to Credit Unions
Any new housing finance system must contain provisions to ensure
credit unions can retain servicing rights to loans they make to their
members. While many turn to credit unions for lower rates and more
palatable fee structures, they also want to work with a reputable
organization they trust will provide them with high quality service.
Because credit unions work so hard to build personal relationships with
their members, relinquishing servicing rights has the potential to
jeopardize that relationship in certain circumstances.
At Apple FCU, we currently retain servicing rights on all of our
loans. This was especially beneficial during the economic crisis, as it
allowed our members to approach us when they got in trouble and allowed
us to work with them on their loan and keep them in their home.
Furthermore, we believe the National Credit Union Administration, in
conjunction with the FHFA or whatever entity replaces the FHFA moving
forward, should set standards for other items important to small
lenders. Such a process should be subject to public comment and take
into account the operational expertise of small lenders. The Board of
Directors of the mutual (should this idea be adopted) should also have
a significant voice in the process.
Underwriting Criteria in Any New System
NAFCU has concerns about the ``Qualified Mortgage'' (QM) standard
included in S.1217 for loans to be eligible for the Government
guarantee. We believe underwriting standards may be best left to the
new regulator and do not think that they should be established in
statute. Doing so would allow the regulator to address varying market
conditions and act in a countercyclical manner if needed.
Furthermore, given the unique member-relationship credit unions
have, many make good loans that work for their members that don't fit
into all of the parameters of the QM box. Using the CFPB QM standard
for the guarantee would continue to discourage the making of non-QM
loans.
In particular, NAFCU would support the following changes to the QM
standard to make it more amenable to the quality loans credit unions
are already making:
Points and Fees
NAFCU strongly supports bipartisan legislation in both the Senate
and House to alter the definition of ``points and fees'' under the
``ability-to-repay'' rule set to take effect in January of next year.
NAFCU has taken advantage of every opportunity available to educate and
weigh in with the CFPB on aspects of the ability-to-repay rule that are
likely to be problematic for credit unions and their members. While
credit unions understand the intention of the rule and importance of
hindering unscrupulous mortgage lenders from entering the marketplace,
it is time for Congress to step in and address unfair and unnecessarily
restrictive aspects of this CFPB rule.
NAFCU supports exempting from the QM cap on points and fees: (1)
affiliated title charges, (2) double counting of loan officer
compensation, (3) escrow charges for taxes and insurance, (4) lender-
paid compensation to a correspondent bank, credit union or mortgage
brokerage firm, and (5) loan level price adjustments which is an up-
front fee that the Enterprises charge to offset loan-specific risk
factors such as a borrower's credit score and the loan-to-value ratio.
Making important exclusions from the cap on points and fees will go a
long way toward ensuring many affiliated loans, particularly those made
to low- and moderate-income borrowers, attain QM status and therefore
are still made in the future.
Loans Held in Portfolio
NAFCU supports exempting mortgage loans held in portfolio from the
QM definition as the lender, via its balance sheet, already assumes
risk associated with the borrower's ability-to-repay.
40-Year Loan Product
Credit unions offer the 40-year product their members often demand.
To ensure that consumers can access a variety of mortgage products,
NAFCU supports mortgages of duration of 40 years or less being
considered a QM.
Debt-to-Income Ratio
NAFCU supports Congress directing the CFPB to revise aspects of the
``ability-to-repay'' rule that dictates a consumer have a total debt-
to-income (DTI) ratio that is less than or equal to 43 percent in order
for that loan to be considered a QM. This arbitrary threshold will
prevent otherwise healthy borrowers from obtaining mortgage loans and
will have a particularly serious impact in rural and underserved areas
where consumers have a limited number of options. The CFPB should
either remove or increase the DTI requirement on QMs.
We would also like to caution against the perpetuation of the use
of one brand of credit scoring model. Both Fannie Mae and Freddie Mac
require loans that are underwritten using FICO scoring models. We
believe any new system should be open to other possible credit scoring
models as well.
Finally, NAFCU cautions against the 5-percent minimum downpayment
requirement found in S.1217 for a loan to be Government guarantee
eligible. Downpayment isn't the only indicator in determining
underwriting soundness and we believe a hard downpayment requirement
will reduce a lender's flexibility in matching consumers with a product
that best suits their needs.
Loan Pricing
Prior to the financial crisis, credit unions did not always receive
fair pricing based on quality from the GSEs for their loans, as many
pricing models were based on volume. This has improved in recent years
and NAFCU believes it is critical that this fair pricing based on
quality is maintained in any new system.
Furthermore, while we would support the ability of the mutual to
handle non-QM loans, and even support a guarantee program for non-QM
loans (beyond the emergency power established in S.1217), NAFCU
believes it is important that the pricing for these non-QM loans
reflects the risks that they could pose to the system.
Conclusion
NAFCU appreciates the Banking Committee's bipartisan approach to
housing finance reform and the inclusive nature of the process. While
the proposal in S.1217 represents a positive step in the housing
finance reform debate, we believe there are aspects of the bill that
can be improved. In the end, whatever approach is taken to reform, it
is vital that credit unions continue to have unfettered guaranteed
access to the secondary market and get fair pricing based on the
quality of their loans. The Government must also continue to play a
role by providing some form of Government guarantee to help stabilize
the market.
Thank you for the opportunity to provide our input on this
important issue. NAFCU member credit unions look forward to working
with Chairman Johnson, Ranking Member Crapo, Committee Members, and
your staffs as housing finance reform legislation moves through the
legislative process.
I thank you for your time today and would welcome any questions
that you may have.
______
PREPARED STATEMENT OF JEFF PLAGGE
President and Chief Executive Officer, Northwest Financial Corporation,
Arnolds Park, Iowa, and Chairman, American Bankers Association
November 5, 2013
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, my name is Jeff Plagge. I am president and CEO of Northwest
Financial Corp. of Arnolds Park, Iowa, and Chairman of the American
Bankers Association. ABA represents banks of all sizes and charters and
is the voice for the Nation's $14 trillion banking industry and its two
million employees. Northwest Financial Corp is a privately owned, two
banking holding company with approximately $1.6 billion in assets. We
make between 3,000 and 3,500 mortgage loans per year, virtually all in
our direct markets, and with the exception of Des Moines, IA, and
Omaha, NE, are mostly in rural communities in Iowa. The majority of
those loans are sold into the secondary market but we also portfolio
loans as well, especially in some of our more rural markets due to loan
size or some other issue that makes it difficult to work in the
secondary market. It is a big part of our business model and any
changes affecting mortgage lending are very important to us, our
customers and our communities.
We appreciate the Committee's focus on ensuring that community
banks like mine will continue to have access to a federally guaranteed
secondary market. Such access is necessary to offer our customers the
mortgage credit so vital to the economic health of every community
across America. Small banks have always played an important role in
mortgage finance. Community banks, with assets under $10 billion, hold
over $530 billion (or nearly 23 percent of all 1-4 family residential
loans held by the industry) and, of course, originate and sell billions
of dollars of mortgages, primarily to Fannie Mae and Freddie Mac. These
securities issued by Fannie and Freddie are bought by banks and are an
important asset class for them, amounting to over $300 billion as of
the second quarter of 2013. Perhaps, most importantly, in one out of
every five U.S. counties, there is no other physical banking office
except those operated by community banks, according to the FDIC
Community Banking Study. Without these banks, residents of these
communities will find mortgage credit harder to get and more expensive.
Reforming this segment of the mortgage market will be a complex
undertaking with far reaching consequences for our economy. It must be
undertaken in a thoughtful, orderly manner. We commend the Committee
for the serious focus it continues to give these issues, and
particularly the leadership of Senators Corker and Warner and the
cosponsors of S.1217 in establishing a framework to build upon to
reform the system. We believe that a Government guarantee on a limited
segment of the market focused on low and moderate income mortgage
borrowers is essential. That guarantee must be explicit, fully priced
into the cost of each mortgage to which it applies, and, perhaps most
importantly, available to all eligible primary market lenders,
regardless of their size, charter type, geographic location, or number
of loans sold into the secondary market. Community banks must remain
able to access that guarantee. If these banks' access is curtailed or
denied, or their pricing in the market is inequitable, they and the
communities they serve will suffer.
As important as this Federal Government support is, going forward
it should be within a mortgage market predominately filled by the
private sector. Fostering and encouraging a private market for the vast
majority of housing finance must be part and parcel of any Federal
policy and should be balanced with Government support for certain
market segments.
We believe that a mutual organization--if structured in an
economically viable way and with appropriate governance--may be a
promising approach to accomplish the goals of equitable access to
secondary market liquidity for community banks--indeed all banks. In
fact, in 2011, ABA wrote Treasury Secretary Geithner and HUD Secretary
Donovan noting that a possible structure for a transition vehicle (and
potential end point) for Fannie Mae and Freddie Mac could include: ``a
well-regulated and controlled cooperative structure owned by the
financing entities or a similarly controlled secondary market public
utility that is publicly owned.'' We went on to say that: ``Whatever
structure is chosen will require significant control and direction of
guarantee fees, mission, investor returns and potential taxpayer
liability. Activities under the structure will need to be confined to a
controlled mission intended, among other things, to foster and
accommodate development and expansion of private sector mortgage
financing alternatives.''
A multiplicity of access points to the Federal guarantee is
desirable, with the mutual portal being one avenue. For example, many
community banks also have existing relationships with larger
institutions, through a correspondent or other arrangements, enabling
them to sell mortgages that may be placed into a securitization at some
point. Community banks should be able to sell into the mutual portal--
even for only one loan--or continue to sell through other channels. The
key point is that existing relationships and channels should not be
harmed by any creation of a new portal to the secondary market.
One of the most important existing relationships, particularly for
portfolio mortgage lenders, is the Federal Home Loan Bank System. A
principle long held by ABA is that any reform of the secondary mortgage
market must recognize the vital role played by the Federal Home Loan
Banks and must in no way harm the traditional advance businesses of
FHLBanks or access to advances by their members, particularly for
community banks.
In your invitation letter, Mr. Chairman, you have raised many
important questions about possible reforms. In answering these, I would
like to frame the discussion under four main themes:
Any reform of the GSEs must provide fair and equitable
access to all primary market lenders selling into the secondary
market;
A mutual organization may be promising but must be
economically viable and have the appropriate governance
structure to assure fair and equitable access for all lenders--
particularly community banks;
An enhanced role for the FHLBanks holds promise, but must
preserve and protect the system's current vital role; and
A transition to a new system must ensure that mortgage
markets are not destabilized.
Any Reform of the GSEs Must Provide Fair and Equitable Access to All
Primary Market Lenders Selling Into the Secondary Market
ABA has long maintained that the primary goal of any Government
involvement in the mortgage markets should be to provide stability and
liquidity to facilitate the ability of banks and other primary mortgage
lenders to provide home loans for creditworthy borrowers. This can only
be achieved if there is fair and equitable access by all primary market
lenders selling into the secondary market. In this regard, ABA commends
the Committee for its attention to the concerns of small lenders and
their ability to access secondary market funding, which has
historically been difficult in some parts of the country. The
overarching goal of reform legislation should be to ensure all eligible
lenders--whether small, medium or large--have access to the Federal
guarantee regardless of the number of loans they seek to sell, their
geographic location, or the prevailing economic cycle. As market
dynamics change it is not just small lenders who can potentially be
disadvantaged and we want to work with you to ensure that banks of all
sizes and charter types are able to equitably access the federally
backed system that is contemplated.
A Mutual Organization Holds Promise but Must Be Economically Viable
With Governance That Assures Equitable Access for All Banks
S.1217, legislation introduced by Senators Bob Corker and Mark
Warner, and cosponsored by a number of Members of this Committee,
contemplates at least two avenues of access to the Federal guarantee
for smaller lenders--a mutual entity which would be chartered
specifically for smaller entities and an expanded role for the Federal
Home Loan Banks. While both of these approaches hold certain appeal,
both come with risks and potential problems, not the least of which is
capitalization. For example, a mutual open only to smaller lenders
would be very difficult to sufficiently capitalize, as the potential
members have limited available funds to contribute and the cost of
capitalizing the mutual, if priced into the mortgages originated by
such institutions, may well make them noncompetitive with other
mortgage providers.
We would recommend that the Committee consider a third alternative,
which would be the creation of a mutual entity which would not be
limited to only small lenders. Under such a concept, a mutual would be
created which would be open to all lenders who would have to buy into
the mutual at a sufficient level to capitalize it. By expanding the
potential membership, the base of potential capital may be expanded to
a large enough degree that capitalization costs are more easily
achieved. One key feature that must not be overlooked in developing
such an entity is the ability of participants to be able to redeem
their capital investment should they choose to leave the system, much
like the redemption process allowed to members of the Federal Home Loan
Bank system.
If a mutual were to be created as an access point to the Federal
guarantee, it must be structured to ensure equitable access for all
members, regardless of size or charter type. This would involve
statutory mandates as to the mission, purpose, and activities of the
mutual. It would also require a governance structure that balanced the
rights and needs of members of all sizes and types. Under a mutual
structure, larger members (and/or those members who engage in the most
activity with the mutual) would have the larger investment and thus
likely the larger number of shares to vote. This could lead to a
``capture'' or ``dominance'' of the mutual by these larger
institutions. In order for the mutual to work for all members, it may
not be able to function purely as an entity where members vote their
shares regardless of size, but would need to have a governance system
that balanced the rights and needs of all members. The Federal Home
Loan Bank system can serve as one model for such governance. It is a
system that is cooperatively owned, but which has complex governance
rules which balance the needs and rights of all members.
Whatever structure is ultimately adopted, one feature that it must
include is the ability to sell loans individually or in small numbers
for cash. Some refer to this as the ``cash window'', and it is an
essential feature for smaller lenders, or lenders who do not originate
or sell large numbers of mortgage loans but still seek access to the
secondary market. My bank sells loans via the cash window, as it is not
only hard to have sufficient volume to execute our own mortgage-backed
securities and the interest rate risk and pipeline management would be
too high.
Sellers must also be able to retain servicing or sell it as best
meets their needs. Our larger bank does retain servicing rights on many
loans and we have built up our secondary market servicing portfolio
over the past several years. We now service Freddie Mac loans totaling
over $587 million. Our customers always prefer that we service their
mortgages, but there are capital limitations for how much we can hold
in mortgage services rights within our banks.
Any access point or points must ensure both the cash and servicing
features are available and ensure that smaller lenders (or those
lenders only selling small numbers of loans) are not disadvantaged
through pricing on the loans themselves or the sale of the servicing.
One of the actions taken by the Federal Housing Finance Agency as
conservator of Fannie Mae and Freddie Mac was to eliminate volume
pricing by the GSEs. This is an approach that must be continued in
whatever new access points are established going forward. We encourage
consultation with FHFA on their experiences in managing this outcome
during conservatorship.
In your invitation letter, Mr. Chairman, you asked about a duty to
serve underserved populations or geographies included in any new
guarantee housing finance system. Banks already have such a mandate to
serve all segments of their community through the Community
Reinvestment Act. Similarly, their mortgage lending activity is tracked
through the Home Mortgage Disclosure Act and banks are examined for
compliance with both acts on a regular basis. No further duty to serve
is needed for banks. Other lenders, be they credit unions or mortgage
banks or other entities which are not currently required to meet
similar mandates, should be subject to specific duties to serve in
order to place all mortgage lenders seeking a Federal guarantee on a
more equal lending footing and to help ensure more equitable lending
choices for all borrowers.
An Enhanced Role for FHLBanks Must Preserve Its Current Vital Role
S.1217 also contemplates an expanded role for the Federal Home Loan
Banks. While this should be considered, there are many issues that must
be addressed. FHLBanks, as member-owned cooperatives, serve their large
and small members very well, and are self-capitalized entities (and are
in the process of increasing their reserves). However, this is capital
which is already fully deployed and cannot be repurposed for new
activities, absent the consent and direction of the members/owners of
the System, or diluted in its capacity to absorb FHLB losses. In order
to fully function as an alternative option to Fannie Mae and Freddie
Mac--including taking on credit enhancement and securitization
activities--the Federal Home Loan Banks would have to seek substantial
additional capital from their members. Again, these institutions are
unlikely to have the funds necessary to provide such capital, and if
the cost of raising such capital were priced into mortgage
originations, the mortgages may be unaffordable and noncompetitive.
Expanding the role of the FHLBanks in this fashion also leads to a
number of other potential problems, including the fact that FHLB
membership is not available as an option for all potential lenders
(such as mortgage banks or brokers), and opening the system to these
nondepositories would pose great and untenable risks to the existing
owners-members of the system. Another problem is that the added risks
associated with the new activities envisioned may be unappealing to a
significant portion of the FHLB membership, which may resist expanding
into these new lines of business, even if sufficient capital were
available.
A more limited expansion of the role of the Federal Home Loan Banks
may be more feasible. For example, you asked in your invitation letter
about the feasibility of FHLBanks as aggregators of mortgages or
security issuers. It is possible that the FHLBs' role as aggregators of
loans originated by their members could be expanded, including the
ability to hold such loans on their balance sheets for a period of time
to facilitate the efficient aggregation and sale to investors (and to
promote the cash sale of individual loans by members). It may be
possible to authorize the FHLBs to issue securities as well, which is a
position supported by some of the individual Banks in the System. Such
a change must take care to ensure that securitization authority comes
with sufficient oversight to ensure that it does not pose undue risk to
an individual Federal Home Loan Bank or its counterparts, given the
joint and several nature of FHLBank debt.
Another serious concern relates to the regulatory oversight of the
FHLBanks. ABA is concerned with the approach taken in S.1217 which
would transfer the supervisory and regulatory functions over the
Federal Home Loan Banks from the Federal Housing Finance Agency to a
newly created Federal Mortgage Insurance Corporation (FMIC). We are
concerned that doing so creates a conflict of interest, whereby the
FMIC is both a regulator of and to some degree a competitor to the
Federal Home Loan Bank system. Both the FHLBs and FMIC would have a
mission of supplying liquidity to the mortgage finance system. The
FMIC, as currently envisioned, would likely grow to support a larger
segment of the overall market than the FHLBs in their current form.
Placing regulation of the FHLBs with the FMIC is likely to lead, at
best, to neglect of the System and, at worst, to regulatory policies
that may disadvantage the System and its owners/users.
Instead, we urge a different approach to the regulatory structure
than that envisioned in S.1217. The FMIC should not serve as both a
guarantor and a regulator, and with specific regard to FHLBanks, the
traditional advance business should not be regulated by the new
guarantor. Any expanded powers and activities granted to the FHLBanks
which would permit them to engage in new activities (such as
aggregation and securitization) under the new system, could potentially
be regulated by the new regulator over the FMIC (as described above) on
a functional basis, with the traditional advance activities of the
Federal Home Loan Banks regulated by a separate agency devoted to only
their regulation.
Finally, it is important to note that the Federal Home Loan Banks
have functioned very successfully for 80 years in serving the liquidity
needs of their member/owners and the communities and borrowers those
lenders serve. No action taken by Congress should serve to destabilize
or otherwise threaten that liquidity function.
A Transition to a New System Must Not Destabilize Mortgage Markets
ABA has long held that any transition to a new system must be
undertaken carefully over a number of years to ensure that the mortgage
markets are not destabilized.
Many details of a transition will be dictated by the ultimate new
structure determined for the guarantor and the roles ultimately to be
played by the private market in the new system. It is possible for a
phased transition whereby some of the functions currently performed by
Fannie and Freddie are slowly devolved to the private sector, such as
aggregation and issuance of securities, with the role of Fannie and
Freddie shrinking over time until they were only providing the
guarantee function, which could ultimately be switched to the new
guarantor. It will be essential that existing securities issued by
Fannie and Freddie remain guaranteed going forward. Given the risk
sharing exercises recently undertaken by Fannie Mae, it is possible
that a transition could include a ramp up of such activities tailored
to provide the framework for the first loss position desired under a
new system.
Assets of the GSEs, including the automated underwriting systems
and the single securitization platform, will have value to entities
involved in a new system, and this relative value should be considered
when determining how to best allocate them. If the Committee adopts the
mutual open to all eligible primary market lenders as we have
recommended above, we believe that there is merit in transferring these
systems and the platform to this mutual. My bank, like many community
banks, utilizes one of the GSEs' automated underwriting systems as it
provides significant benefits, such as faster loan approvals, reduced
closing costs, less documentation, and approval of loan applications
that in the past were denied. We find Freddie Mac's automated system to
be a valuable tool to aid in decision making. The automated
underwriting systems cannot fully evaluate a file like a live
underwriter can especially in the areas of character and collateral. We
place a lot of importance on consistent evaluation and strong guidance
on loan files to ensure equitable decision making.
Going forward, we also believe that the door should remain open to
other underwriting systems beyond those owned by the GSEs for
determining eligibility for the Federal guarantee going forward. Doing
so encourages innovation. Any privately developed systems would have to
be carefully evaluated and tested to ensure that they provide the same
or better underwriting determinations as the existing systems.
Additionally, transparency in any underwriting system should be
encouraged, including in the existing systems or any evolution of them.
Conclusion
ABA believes that a Government guarantee on a limited segment of
the market focused on low and moderate income mortgage borrowers is
essential. This is best accomplished by developing a sustainable,
rational, and limited role for the Federal Government in supporting and
regulating mortgage markets so that there will always be credit
available to qualified homebuyers not only during economic upswings but
most importantly during downturns. Importantly, the Government
guarantee must be explicit, fully priced into the cost of each mortgage
to which it applies, and available to all eligible primary market
lenders on an equitable basis regardless of size, charter type,
geographic location, or number of loans sold into the secondary market.
If community banks' access to that guarantee is curtailed or denied, or
their pricing in the market is inequitable, they and the communities
they serve will suffer.
We believe that S.1217 offers a good starting point for reform, but
further work and detail is required. We hope that our comments,
particularly with regard to the proposed mutual concept and the
possible expansion of the activities of the Federal Home Loan Banks are
helpful.
We have been pleased to work with the Committee and to provide
feedback to your questions and stand ready to assist further. The
current conservatorship status of Fannie Mae and Freddie Mac is
unsustainable over the long term, as is a return to ``business as
usual'' without significant reform of the Government's role in the
secondary mortgage market. ABA and our members are committed to working
with you to achieve a sustainable, durable, and equitable system.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM RICHARD SWANSON
Q.1. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.1. There have been many instances in which Congress has
provided for the initial capitalization of a mutual or
cooperative type vehicle. Below are examples of some of the
more prominent cooperative entities established by Federal law.
FHLBanks
The initial capitalization of the Federal Home Loan Banks
was in the form of an injection of $125 million in Government
funds. At the same time the Banks were directed to issue
capital stock to members in an amount equal to 1 percent of any
outstanding advance, with a minimum purchase requirement of
$1,500. When the amount of paid in capital contributed by
member institutions equaled the amount of the Treasury
contribution, the Banks were required to repay the Treasury by
allocating 50 percent of any additional capital contributions
to retiring the Treasury's capital.
FHA Mutual Insurance Fund
The FHA's mutual insurance fund was created by the National
Housing Act of 1934. The Fund was initially capitalized by the
Federal Government in the amount of $10 million.
Rural Electric Cooperatives
Rural Electric Cooperatives are mutual organizations that
provide electricity to rural areas of the country that could
not be economically served by privately owned electric
utilities. The formation of these State-chartered mutual
organizations was encouraged by the Rural Electrification
Administration (REA). Pursuant to the Rural Electrification Act
of 1936 the REA was authorized to provide startup capital to
these cooperatives through Federal loans with an amortization
period of up to 25 years. In 1949 this program was expanded to
include cooperatives providing rural telephone services.
Farm Credit System
The Farm Credit System is a nationwide network of borrower-
owned lending institutions established by Congress in 1916 to
provide a reliable source of credit for the Nation's farmers
and ranchers. Under the 1916 legislation, the United States was
divided into 12 Federal land bank districts, and a member-owned
Federal Land Bank was established in each district. The Federal
Land Banks were supervised by a new agency, the Federal Farm
Loan Board. Initial capitalization was set at $750,000 for each
bank. The Federal Farm Loan Board was directed to solicit
subscriptions for these shares, but if the required amount for
any bank was not raised within 30 days, the Federal Farm Loan
Board was to purchase the shares necessary to reach the minimum
capitalization level.
In 1933 Congress was required to recapitalize the Federal
Land Banks through an appropriation of $189 million. Later that
year Congress passed the Farm Credit Act that, among other
things, expanded the program by establishing 12 Production
Credit Associations and 12 Banks for Cooperatives. The initial
capitalization of both were provided through appropriations.
Q.2. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.2. Under the Federal Home Loan Bank Act, the board of
directors of each Federal Home Loan Bank is responsible for the
management of that Bank. A majority of the board must be member
directors, and at least 2/5ths of each board must be comprised
of independent directors, including public interest directors.
A member director is a director who is also an officer or
director of a member institution located in the same district
at the Bank. An independent director does not have such a
position in a member institution. A public interest director is
a director who has had at least 4 year's experience in a
consumer or community group or similar organization.
All directors must be elected by a plurality vote of the
member institutions. The member directorships are allocated to
the States within the Bank's district, based on several factors
including the percentage of required Bank stock held by
institutions within each State. The institutions located in
each State nominate a person for the directorship allocated to
that State. Independent directors are elected by a plurality
vote of the members of the Bank at large.
The Federal Home Loan Bank Act provides that no member may
cast a number of votes in the election of directors greater
than the average number of shares all the members in its
specific State are required to hold. This prevents large
members holding relatively large amounts of a FHLBank's capital
stock from dominating director elections and, in practice,
means that the majority of each FHLBank's member directors
generally represent the smaller institutions that make up the
great majority of all members.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM WILLIAM A. LOVING, JR.
Q.1. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.1. ICBA has recommended an appropriation from the revenues of
Fannie Mae and Freddie Mac to provide the initial
capitalization of the mutual securitization company. ICBA also
recommends that mutual could assess a modest fee to all
approved lenders that sell loans to the mutual on an annual
basis. This annual fee should not exceed $1,000.
Q.2. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.2. ICBA has recommended the board of the mutual be
constructed similar to the boards of the FHLBs which have dealt
with this issue.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM BILL HAMPEL
Q.1. In describing the ways in which first loss private capital
could be structured, you state that while either a bond
guarantor or some kind of senior-sub risk sharing transaction
could accomplish this goal ``in theory,'' you believe that
``the bond guarantor approach would be preferable'' in
practice. Could you please elaborate?
A.1. In principle, either a bond guarantor or some form of
senior-subordinate structure could serve to provide private
capital to absorb first losses on covered securities. In this
context, bond guarantors would be firms that conduct the
routine business of guaranteeing covered securities, building
sufficient reserves to cover potential losses on all securities
guaranteed by that firm. Senior-sub structures on the other
hand would produce tranches of securities that could be
purchased by any investor who happened to have an appetite for
that type of security when it was issued.
There are two drawbacks to the senior-sub structure as
compared to bond guarantors. First, because of economies of
scale in gathering information on individual loans and
securities, senior-sub structures would be more economical for
securities created by large issuers. Smaller originators would
be at a disadvantage under senior-sub structures. Second, the
risk-premium (price of the guarantee) of the subordinate
portion of a senior-sub structure would vary dramatically
through time, depending on investors' current evaluation of
risk. That's because each transaction would involve a one-time
exposure to risk for the investor, i.e., the risks of many
securities would not be pooled as for a bond guarantor. In good
times, when investors expect very low early defaults on
mortgages, risk premiums would be very low. In very stressed
markets, not even as severe as the conditions of 2007 to 2009,
risk premiums would be so high as to price most senior-sub
structures out of the market.
Because bond guarantors would build reserves over time,
their pricing would be much more stable. However, the
coexistence of senior-sub structures with bond guarantors would
make it more difficult for bond guarantors to operate, as
senior-sub structures would tend to underprice the market
during good times. Therefore, the bond guarantor approach is
more preferable in practice.
Q.2. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.2. It would be more appropriate for the member/lenders of the
mutual to be able to provide the initial capitalization of the
mutual by means of an asset purchase (capital subscription)
rather by a nonrefundable fee. Should an originator ever wish
to discontinue use of the mutual, it would then be possible for
that lender's capital contribution to be returned after an
appropriate waiting period, and subject to the condition that
the mutual was adequately capitalized. The amount of capital
required of any lender should depend on that lender's sales of
loans to the mutual, adjusted periodically for changes in
volume. Initial volume could be determined by recent sales to
the enterprises. In any event, the amount of capital required
at the mutual should be modest since its balance sheet size
would be very limited. Should the mutual generate net revenue
beyond the amount necessary to maintain retained earnings, the
excess should be returned to member/lenders either as a
patronage refund or a dividend on contributed capital. A
lender's voice in the governance of the mutual should in no way
be weighted by that lender's capital contribution or lending
volume.
The cost of operations of the mutual should be covered by
transactions fees on originators or by the spread between what
the mutual pays for loans and what it sells securities for. The
operations fee or spread should not vary by transaction size.
Q.3. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.3. CUNA strongly supports the one-member, one-vote governance
structure. This can be protected by providing that for purposes
of voting, if a member has any affiliates that might otherwise
be considered members, that member and its affiliates are as a
group entitled to only one vote.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM BILL COSGROVE
Q.1. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.1. Each Mutual Securitization Company should develop
standards and procedures to approve the application of eligible
institutions to become member participants of the Mutual
Securitization Company. In no case should an application be
given preference based on the asset size or potential volume of
eligible mortgages the eligible institution may contribute to
the Company. The fees for initial capitalization and ongoing
access should be equitably assessed and any fees charged on a
per loan basis should not vary based on the asset size or total
volume of eligible mortgages that the member participant sells
to such Mutual Securitization Company.
Q.2. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.2. Companies should have equal voting rights regardless of
the size of the individual member participant or the volume of
eligible mortgages contributed by the member participant. In
order to prevent unnecessary concentration of risk,
systemically important financial institutions should be
prohibited from having controlling interests in mortgage
insurers or bond guarantors.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JOHN HARWELL
Q.1. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.1. Credit unions did not cause the financial crisis, and I
believe historical mortgage lending data should be taken into
account as the secondary mortgage market is reformed. The fee
structures associated with the mutual should be based on loan
quality as opposed to the volume of loans an entity is able to
generate. I also believe asset size should play a factor in
capitalization, with larger entities that opt into the mutual
being responsible for a proportional amount of the
capitalization fees. Fees, for example, could be based on the
dollar amount or number of loans each institution moved through
the mutual in the prior calendar year. This would keep fees in-
line with the level of service the mutual provides to each
member institution.
Q.2. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.2. As outlined in S.1217, I believe that member participants
of the mutual securitization company should have equal voting
rights regardless of the size of an individual member
participant. Any housing finance reform language should be
explicit in this regard, and ensure adequate credit union input
throughout the process. Should such a mutual be adopted, the
Committee should consider restricting the voting rights of
parent or holding companies. As a parent company, you would get
a single vote, regardless of how many subsidiaries you own that
belong to the mutual. This could help address the concern
raised by Senator Reed.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JEFF PLAGGE
Q.1. S.1217 proposes a fee on its member participants for the
initial capitalization of the mutual securitization company.
Specifically, how should such a fee be structured such that
it's fair to all members, especially those members that bring
more capital to the table? How do we balance the need for
initial capitalization with the need for fairness?
A.1. Capital charges to co-op members should be based on the
risks they impose on the co-op entity. Variation in the
riskiness of particular member activities likely will be
governed in part by co-op rules that place limits on,
discourage, or forbid certain types of risk behavior. To the
extent that member actives that create risk for the co-op are
not relatively homogeneous because of these rules, additional
capital charges or other risk mitigation requirements
associated with higher risk-taking activates should be
required.
The primary differences in risks created for the co-op by
member institutions is likely to be defined by the volume of
operations. Capital requirements for each member should be
based on activity levels, in a manner analogous to activity-
based capital requirements required in the Federal Home Loan
Bank System. In other words, capital requirements should be set
by scope of usage of the co-op. Prudential capital standards
and co-op governance cannot be maintained by a system of
capital subscriptions that are equal for each member
institution, as might be inferred by some readers of the
question. In short, ABA believes the best approach is one
similar to that taken by the Federal Home Loan Banks, which
requires an initial purchase of stock (priced at par) for all
members, and an activity based stock purchase requirement based
upon scope of activities and the risks posed by those
activities.
Q.2. S.1217 provides that member participants of the mutual
securitization company shall have equal voting rights
regardless of the size of an individual member participant, and
some have suggested a one member, one vote system. How do we
prevent one member participant from effectively controlling
more than one vote by acquiring controlling stakes in other
member participants?
A.2. It is essential that the largest users of the co-op have
the biggest capital requirements. It is also essential that
some mechanism prevent large users from voting their
correspondingly higher capital positions. Otherwise, the co-op
interests would become subsidiary to the interests of the
biggest members, rather than equitably determined in the
interest of all members. One member, one vote is a mechanism
that might achieve the desired quality of governance. The
Federal Home Loan Bank System has developed a more complex
system to achieve the same objective of not subjugating the
interest of the many to the power of the few. The FHFB approach
is informative, though it developed in a unique institutional
setting and in response to a long history not likely to be
repeated. Therefore, the FHLB voting mechanisms might not be
easily applied in a new institutional setting but can still
serve as a guide for establishing a structure that balances
members' interests and needs with their market activities and
size.
Additional Material Supplied for the Record
PREPARED STATEMENT SUBMITTED BY MARY MARTHA FORTNEY, PRESIDENT AND CEO,
NASCUS
Chairman Johnson, Ranking Member Crapo, and distinguished Members
of the Committee:
The National Association of State Credit Union Supervisors (NASCUS)
appreciates the opportunity to provide this written statement for the
record of the November 5, 2013, Senate Committee on Banking, Housing,
and Urban Affairs hearing regarding the importance of protecting credit
union access to the secondary mortgage market. As the professional
association of the Nation's State credit union regulatory agencies,
NASCUS has been committed to enhancing State credit union supervision
and advocating for a safe and sound State credit union system since its
inception in 1965.
NASCUS applauds the Committee's efforts in addressing this
difficult issue and providing much needed reform to the housing finance
market. While the Housing Finance Reform and Taxpayer Protection Act of
2013 (S.1217) provides for wide-ranging reform, NASCUS' comments will
focus on the prudential benefits of maintaining credit union access to
the secondary mortgage market, and the importance of streamlined
coordination and information sharing between any new Federal regulatory
agency and the primary prudential regulator for the issuing or
servicing financial institution.
Credit unions serve more than 97 million members across the country
and play a vital role in the first mortgage market, especially in
markets where larger financial institutions do not operate. Without a
legislative mandate to maintain small lender access to the system,
small lenders will effectively be shut out of the secondary market,
which will undermine their ability to provide loans and services in
already underserved areas. Any reform to the housing finance system
should preserve the ability of small institutions to sell single loans
directly into the secondary market, maintain existing standardization
and digital underwriting programs, and embrace a pricing structure that
values loan quality over lending volume. Small and medium sized credit
unions generally do not produce the type of loan volume that would be
required to participate in a secondary market system without these
provisions built in.
Credit unions did not cause the financial crisis, and their
cooperative structure and conservative community based lending model
allowed them to serve as a source of stability during the financial
crisis when other lenders were unable or reluctant to provide needed
credit in the housing marketplace. The reformed system should recognize
the countercyclical benefits of maintaining an active presence of
cooperative financial institutions in the mortgage market and the bill
should protect that presence through appropriate pricing and access
mechanisms.
From a safety and soundness perspective, the ability to sell
mortgages into the secondary market helps credit unions to manage
interest rate risk and provides them with a source of liquidity. While
most depository institutions are vulnerable to interest rate risk
because they use short-term liabilities to fund long-term fixed-rate
assets, credit unions face an additional challenge in that their
ability to generate capital from other sources when interest spreads
tighten is limited by statute. \1\
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\1\ Under current law, most credit unions are limited to retained
earnings to build their net worth ratio for Prompt Corrective Action
(PCA) purposes. The Capital Access for Small Businesses and Jobs Act
(H.R. 719) would amend the Federal Credit Union Act to allow
sufficiently capitalized and well-managed credit unions to receive
payments on certain uninsured nonshare accounts, and count them toward
PCA requirements. NASCUS supports this important and necessary
legislation.
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As not-for-profit cooperative institutions, credit unions cannot
turn to investors to generate needed capital, and must rely on their
retained earnings. Consequently, credit unions must be particularly
vigilant regarding rising interest rates, which can deplete retained
earnings as the cost of funds rise compared to the credit union's
return on assets. Although credit unions have an assortment of tools
with which to manage interest rate risk, the ability to sell fixed-rate
mortgages into the secondary market remains a critical element of
effective risk management for many credit unions. In addition, the
ability to sell individual mortgages directly into the secondary market
for cash provides credit unions with a valuable source of liquidity,
which enables them to offer additional loans and better products to
their members. State regulators want to ensure that the pursuit of a
safe and sound secondary market does not inadvertently undermine the
ability of entities that offer consumer friendly fixed-rate mortgages,
such as credit unions, to provide vital financial products to their
members in a safe and sound manner.
NASCUS urges the Committee to facilitate an orderly secondary
market system that works in coordination with primary State and Federal
regulators in order to ensure seamless oversight while minimizing
regulatory burden. The Committee should consider amending S.1217 to
require the Federal Mortgage Insurance Corporation (FMIC) to coordinate
with primary prudential regulators, whether State or Federal, when
promulgating rules that would affect the institutions under their
jurisdiction.
Currently, section 212(a)(3) only requires FMIC to coordinate with
the Consumer Financial Protection Bureau (CFPB) and, to the extent
practical and appropriate, the other Federal banking agencies when
developing standards for approval of servicers to administer eligible
mortgages. As of March 2013, almost 40 percent of all credit unions in
the country were State-chartered, and the ability to retain servicing
rights on their members' loans is important for many of them. As a
result, many State-chartered credit unions may be tweaking their
operations in order to qualify as a mortgage servicer with FMIC. A
statutory mandate that includes coordination with State regulators
would facilitate information sharing and discussion that could prevent
duplicative or conflicting regulation, reduce unnecessary cost and
delay, and facilitate safe, sound, and efficient oversight of the
mortgage market as a whole. \2\
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\2\ NASCUS would be happy to suggest appropriate statutory
language or meet with Committee staff to elaborate on this suggestion.
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NASCUS appreciates the opportunity to submit written comments to
the Senate Committee on Banking, Housing, and Urban Affairs on this
important issue. As drafted, S.1217 reflects a real understanding of
the value that small lenders bring to the system, and NASCUS
appreciates the efforts of the Committee in fine-tuning the proposal to
ensure access for all lenders. NASCUS and its State regulator members
are available to answer any questions that the Committee may have
regarding the safety and soundness implications of the proposed reform,
and we look forward to continued dialogue on the issue as the bill
progresses.