[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

=======================================================================

                                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

                              ----------                              

                       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

                              ----------                              


                       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\
---------------------------------------------------------------------------
     \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.
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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.


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    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.
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     \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.
---------------------------------------------------------------------------
     \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.''
---------------------------------------------------------------------------
    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.


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    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.


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    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).


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    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.


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    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.
                                ------                                


         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.
                                ------                                


         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.
                                ------                                


         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.
                                ------                                


         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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \2\ NASCUS would be happy to suggest appropriate statutory 
language or meet with Committee staff to elaborate on this suggestion.
---------------------------------------------------------------------------
    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.
