[Senate Hearing 115-109]
[From the U.S. Government Publishing Office]
S. Hrg. 115-109
HOUSING FINANCE REFORM_MAINTAINING ACCESS FOR SMALL LENDERS
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE ROLES THAT SMALL LENDERS PLAY IN THE MORTGAGE MARKET
__________
JULY 20, 2017
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Travis Hill, Senior Counsel
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Erin Barry, Democratic Professional Staff Member
Megan Cheney, Democratic Legislative Assistant
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JULY 20, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Brenda Hughes, Senior Vice President and Director of Mortgage and
Retail Lending, First Federal Savings Bank of Twin Falls,
Idaho, on behalf of the American Bankers Association........... 4
Prepared statement........................................... 30
Responses to written questions of:
Senator Cotton........................................... 77
Tim Mislansky, Senior Vice President and Chief Lending Officer,
Wright-Patt Credit Union, and President, myCUmortgage, LLC, on
behalf of the Credit Union National Association................ 5
Prepared statement........................................... 34
Jack E. Hopkins, President and Chief Executive Officer, CorTrust
Bank, N.A., Mitchell, South Dakota, on behalf of the
Independent Community Bankers of America....................... 7
Prepared statement........................................... 44
Responses to written questions of:
Senator Cotton........................................... 77
Chuck Purvis, President and Chief Executive Officer, Coastal
Federal Credit Union, Raleigh, North Carolina, on behalf of the
National Association of Federally Insured Credit Unions........ 9
Prepared statement........................................... 47
Responses to written questions of:
Senator Cotton........................................... 78
Wes Hunt, President and Chief Executive Officer, Homestar
Financial Corporation, Gainesville, Georgia, on behalf of the
Community Mortgage Lenders of America.......................... 10
Prepared statement........................................... 58
William Giambrone, President and Chief Executive Officer,
Platinum Home Mortgage, Rolling Meadows, Illinois, and
President, Community Home Lenders Association.................. 12
Prepared statement........................................... 66
Additional Material Supplied for the Record
Letter submitted by Capital Markets Cooperative.................. 80
Letter submitted by The Mortgage Collaborative................... 83
Statement submitted by the Mortgage Bankers Association.......... 85
Joint letter submitted by consumer and housing industry groups... 93
Letter submitted by the Mortgage Bankers Association............. 95
Joint letter submitted by Senator Scott.......................... 97
Joint letter submitted by small and mid-sized trade associations. 98
(iii)
HOUSING FINANCE REFORM--MAINTAINING ACCESS FOR SMALL LENDERS
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THURSDAY, JULY 20, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Today the Committee will continue its series of hearings on
housing finance reform. In May, Treasury Secretary Mnuchin and
FHFA Director Watt both appeared before the Committee and gave
their perspectives on the state of housing finance and the
housing finance reform prospects.
In June, we held a hearing on the principles of housing
finance systems featuring three witnesses, each with a deep
background in housing finance. Today we will hear from a range
of small lenders, representing community banks, credit unions,
and non-depositories.
Small lenders play a critical role in the mortgage market.
This is especially true in rural States like Idaho, as well as
other communities across the country. Small lenders are often
fixtures in their communities who extend credit based on local
knowledge and expertise.
As we contemplate how to reform the housing system, we must
understand how small lenders access the secondary market and
ensure that such access is preserved in the new system.
Today small lenders often sell mortgage loans to Fannie Mae
and Freddie Mac through the cash window at each enterprise,
which allows lenders to exchange individual loans for cash.
Among the benefits of the cash window is that it allows small
lenders to access the secondary market without selling loans to
competitors.
I look forward to hearing from our witnesses today
regarding what a reformed system must include to ensure small
lenders can access the secondary market.
In past hearings on housing, I have discussed housing
finance reform principles that I believe share bipartisan
support. We need to preserve the to-be-announced market and an
affordable, accessible 30-year fixed-rate mortgage.
We must have multiple levels of taxpayer protection
standing in front of any Government guarantee, including
downpayments, loan-level insurance, and, very importantly,
substantial, robust, loss-absorbing private capital.
The transition to a new system must be orderly and
deliberate, and it should utilize existing market
infrastructure where possible. These are foundational
principles that are consistent with many of the reform plans
that have been proposed in recent years.
Fannie Mae and Freddie Mac have been in conservatorship for
close to 9 years. While some have grown accustomed to the
current system, the status quo is not sustainable. A mortgage
market dominated by two huge Government-sponsored companies in
conservatorship is not a long-term solution and is not in the
best interest of consumers, taxpayers, lenders, investors, or
the broader economy.
The GSEs are currently earning profits, but taxpayers could
again be on the hook for billions of dollars when the housing
market experiences its next downturn. Reform is urgently
needed.
I look forward to working with other Members of this
Committee and the witnesses today, as well as the groups they
represent, as we develop a long-term solution for our housing
finance system.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Crapo. Thank you for
holding this hearing. I would like to first welcome all of our
witnesses, including a lender from Ohio.
Tim Mislansky is the senior vice president/chief lending
officer at Wright-Patt Credit Union. He lives in West Chester,
Ohio. The credit union is located outside of Dayton in
Beavercreek. It serves the Dayton area and communities between
Cincinnati and Columbus like Xenia.
His credit union is the largest lender on this panel, with
$3.5 billion in assets. There is some irony in that always at
our Committee hearings, and I appreciate Ms. Hughes being here
as a constituent of Chairman Crapo. I also find it interesting
that the ABA is almost never represented by the people that
stop by my office as the CEO of one of the largest banks in
America did yesterday. It is always represented by a community
bank. I appreciate that. I appreciate your being here, but I
also always find that a bit interesting.
Tim knows how small lenders serve smaller cities and
suburban markets. His expertise is a valuable addition to our
housing finance reform process. I thank him for that.
As we have heard repeatedly in this Committee, small
lenders are often the only lenders willing to go the extra mile
to underwrite mortgages in areas that are too often left behind
by Washington and by Wall Street--in cities' urban core and in
rural communities. Community lenders know their customers and
the needs and challenges of the cities and the towns they
serve.
During the Committee's last effort, 3 years ago, I guess,
on housing finance reform, S. 1217 included a small lender
mutual, but the system created in the bill simply did not
include enough protections to prevent large lenders from
controlling the secondary market. Without firewalls between the
primary and secondary markets, we lose a layer of
accountability for underwriting; we create loopholes that
permit concentration of risk.
We saw during the housing crisis how consolidation of
primary market and secondary market operations within a single
entity can hurt borrowers and hurt entire communities.
The Financial Crisis Inquiry Commission found that in 2008,
private label loans had a delinquency rate of over 28 percent
compared to a delinquency rate of just 6 percent for GSE loans.
That discrepancy is pretty alarming and illuminating. States
like Ohio and Nevada are still feeling the impact of those
predatory private loans.
In the same way that the GSEs are prohibited from
originating mortgages, originators and their parent companies
should be prohibited from any ownership of guarantors.
Proposals for reform range from a complete overhaul of the
mortgage market to narrow, surgical changes. Looking at what
current and future homeowners and lenders stand to lose in
reform is as important as the desire to change the system.
Looking out for Americans who are trying to buy homes and
stay in homes and build better lives for their families has to
be by far the number one priority of this Committee and of this
legislation.
I look forward to hearing from our witnesses about how the
housing finance system could be improved and should be improved
to better serve small lenders and their customers, as well as
what should be preserved and protected.
While we are discussing the importance of community
lenders, we should also include the important work of housing
counselors, CDFIs, and community organizations.
Their work helped families achieve stable home ownership
before the crisis and helped families keep their homes during
the crisis. The importance of pre- and post-purchase housing
counseling cannot be ignored during this legislative process.
As we continue to debate the role of the GSEs, private
capital, and large financial institutions in providing access
to affordable mortgages, we cannot and should not create a
system that allows the GSEs or new players to use a business
model that serves only the largest lenders, the highest income
borrowers, or the well-off pockets of our country. I think you
all recognize that. We need a model that allows all Americans,
in every corner of the country, to become homeowners and to
remain homeowners.
If the Government is going to have a role backing the
housing market--and I believe we should--then that market must
work for everyone, everywhere, not just those with the most
lobbyists in this town and not just those with the deepest
pockets.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
Now we will turn to the oral testimony. First, we will
receive testimony from Ms. Brenda Hughes, senior vice president
and director of mortgage and retail lending at First Federal
Savings Bank of Twin Falls, Idaho, on behalf of the American
Bankers Association. And thanks, Brenda, for bringing some of
Idaho's common sense here to Washington.
Ms. Hughes. Good morning.
Chairman Crapo. Next we will hear from Mr. Tim Mislansky,
senior vice president and chief lending officer of Wright-Patt
Credit Union, and president of myCUmortage, on behalf of the
Credit Union National Association.
Then we will hear from Mr. Jack E. Hopkins, president and
CEO of CorTrust Bank, on behalf of the Independent Community
Bankers of America.
Following Mr. Hopkins, we will hear from Mr. Charles M.
Purvis, president and CEO of Coastal Federal Credit Union, on
behalf of the National Association of federally Insured Credit
Unions.
Then we will hear from Mr. Wes Hunt, president of Homestar
Financial Corporation, on behalf of the Community Mortgage
Lenders of America.
And, finally, we will hear from Mr. Bill Giambrone,
president and CEO of Platinum Home Mortgage, on behalf of the
Community Home Lenders Association.
Each witness is recognized for 5 minutes of oral remarks,
and, Ms. Hughes, you may proceed.
STATEMENT OF BRENDA HUGHES, SENIOR VICE PRESIDENT AND DIRECTOR
OF MORTGAGE AND RETAIL LENDING, FIRST FEDERAL SAVINGS BANK OF
TWIN FALLS, IDAHO, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION
Ms. Hughes. Good morning. Thank you.
Chairman Crapo, Ranking Member Brown, my name is Brenda
Hughes. I serve as senior vice president and director of
mortgage and retail lending for First Federal Savings Bank of
Twin Falls, Idaho. We are a $607 million asset savings
association founded in 1915. I appreciate the opportunity to be
here to present ABA's views on GSE reform and community bank
access.
This issue is a critical one for our country. Americans
have relied on access to long-term fixed-rate mortgages for 70
years. Fannie Mae and Freddie Mac have facilitated access to
this product by providing access to the capital markets for
private market lenders. The GSEs have been in conservatorship
for nearly 9 years. We should not delay reform any longer.
Absent aggregation and securitization, access to long-term,
lower-rate funding would be far more difficult to come by for
most primary lenders. The Government guarantee provided to
mortgage-backed securities guaranteed by the GSEs makes them
attractive to capital markets ensuring liquidity. As we
consider reform, these elements must be preserved and remain
available to support all primary market participants regardless
of size or location.
First Federal relies on this access and actively delivers
loans directly to Freddie Mac, retaining servicing on these
loans. We currently service approximately 5,000 loans. Like so
many banks, both large and small, access to the secondary
market through the federally guaranteed secondary market
enterprises is essential to our ability to meet the mortgage
needs of our customers.
ABA has worked with bankers from all institutions of all
sizes and from all parts of the country to develop shared
principles which should guide reform of the GSEs. From my
testimony today, I would like to highlight a few key
principles. More detail on these principles can be found in my
written testimony.
We believe that the following principles should form the
basis for legislative reform efforts:
First, the GSEs must be strictly confined to a secondary
market role, providing stability and liquidity to the primary
mortgage market for low- and moderate-income borrowers. They
must be strongly regulated, thoroughly examined, and subject to
immediate corrective action for regulatory violations.
In return for their GSE status and the associated benefits,
entities must agree to support all segments of the primary
market and all economic environments and provide equitable
access to all primary market lenders. This includes
preservation of the to-be-announced market and both servicing
retained and sold options.
Mortgage-backed securities issued by the GSEs should carry
an explicit guarantee from the Federal Government. These
guarantees should be fully paid for through the guarantee fees
equitably assessed. The GSEs must be capitalized appropriately.
Strong capital must be tied to sound underwriting practices to
ensure that it is representative of the risk of these
institutions.
Credit risk transfers required by FHFA should be continued
and expanded. The vital role played by the Federal Home Loan
Banks, not to be confused with the roles of Fannie Mae and
Freddie Mac, is working today and must not be impaired.
Congress has an essential role in providing the certainty
necessary to ensure long-term stability of the housing finance
system. Without legislative reform, past abuses may be
repeated.
Some will argue that this can be accomplished by a
regulation, and FHFA has done an admirable job in recent years
ensuring the equitable treatment and addressing other past
abuses. However, regulators and regulatory approaches can
change over time. While a strong regulator must be part of the
reform, so, too, must be clearer statutory guidance.
Reform need not be radical or extreme, but targeted and
surgical. Legislation need not create an entirely new secondary
market structure. In fact, guided by these key principles, we
believe that relatively tailored legislation that takes a
surgical approach to making necessary alterations to the
current system is both desirable and achievable.
These legislative reforms are critical. Just as the Federal
debt market provides the bellwether that makes all private debt
markets more efficient and liquid, an explicit, fully priced,
fully paid for Federal guarantee for a targeted portion of the
mortgage market will be a catalyst for broader market growth
and development. Congress should not defer action any longer.
Nine years of conservatorship is more than enough.
Thank you for the opportunity to share our views with the
Committee. I am happy to answer any questions you might have.
Chairman Crapo. Thank you, Ms. Hughes.
Mr. Mislansky.
STATEMENT OF TIM MISLANSKY, SENIOR VICE PRESIDENT AND CHIEF
LENDING OFFICER, WRIGHT-PATT CREDIT UNION, AND PRESIDENT,
MYCUMORTGAGE, LLC, ON BEHALF OF THE CREDIT UNION NATIONAL
ASSOCIATION
Mr. Mislansky. Good morning, Chairman Crapo, Ranking Member
Brown, Members of the Committee. Thank you for the opportunity
to testify today. My name is Tim Mislansky, and I am the chief
lending officer for Wright-Patt Credit Union in Beavercreek,
Ohio, as well as the president of our credit union service
organization, myCUmortgage. I am also the Chair of the Credit
Union National Association's Housing Subcommittee, on whose
behalf I testify today.
Wright-Patt Credit Union has approximately $3.6 billion in
assets and proudly serves over 330,000 members. We operate
primarily in Dayton and Columbus and have the unique
perspective of serving the urban core and the suburbs of those
cities, as well as the surrounding rural areas. Last year, we
helped over 4,600 families with $600 million in first mortgages
and an additional 1,300 families with second mortgages. Our
CUSO, myCUmortgage, provides a variety of mortgage services to
nearly 200 credit unions, which range in asset size from $6
million up to $1 billion and are located across 25 States. Last
year, we facilitated nearly 9,000 mortgages for $1.2 billion,
making us one of the largest aggregators of credit union
mortgage loans in the country.
As member-owned, not-for-profit financial cooperatives,
many credit unions offer mortgages, and we represent an
increasingly significant source of mortgage credit nationally.
In 2016, credit unions originated over $140 billion in first
mortgages, or 8 percent of the total market. It is clear that
consumers are choosing locally owned and operated 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 access to a functioning, well-regulated
secondary market and a system that will accommodate member
demand for long-term fixed-rate mortgage products. Credit
unions have been largely portfolio lenders, but with
historically low interest rates and growing market share, we
have found it increasingly important to sell long-term fixed-
rate mortgages. Without a functioning secondary market, many
credit unions would severely limit mortgage lending.
Servicing loans is also very important to credit unions for
a number of reasons. Again, as member-owned cooperatives, we
are driven by a desire to provide high-quality member service,
and many credit unions are reluctant to sell the core function
of servicing to others. This is especially important so that
credit unions have the ability to make modifications to loans
to keep borrowers in homes when they experience financial
difficulties.
Because of the strength of this servicing relationship as
well as the member-focused underwriting, the credit quality of
credit union first mortgages held up remarkably well during the
financial crisis, especially compared to that of other lenders,
where net charge-off rates were as much as four times higher.
As we have testified in the past, CUNA supports the
creation of an efficient, effective, and fair secondary market.
To that end, CUNA supports housing finance reform proposals
that are consistent with the following principles:
First, there must be a completely neutral third party
independent of any mortgage-originating institution to ensure
that no participant enjoys an unfair advantage and undue
influence in the secondary market.
Second, the secondary market must be open to lenders of all
sizes on an equitable basis, with access and pricing
independent of lender volume.
Next, the entities providing secondary market services must
be subject to appropriate regulatory and supervisory oversight.
The new system must be durable to ensure mortgage loans
will continue to be made to qualified borrowers even in
troubled economic times. This will require some kind of
explicit catastrophic Federal guarantee funded by appropriate
fees with significant private capital in a first-loss position.
Any new housing finance system should emphasize consumer
education and counseling to ensure that borrowers are able to
remain in their homes.
The housing finance system must provide for predictable,
affordable payments to qualified borrowers, including the 30-
year fixed-rate mortgage. And conforming loan limits should be
reasonable and take into consideration local real estate prices
in higher-cost areas.
Credit unions should have the option to retain or sell the
right to service their member mortgage loans, regardless of
whether that loan is held in portfolio or sold in the secondary
market.
And, finally, the transition from the current system must
be orderly to prevent significant disruption to the housing
market which would harm homeowners, potential homebuyers, the
credit unions who we serve, and the Nation's housing market as
a whole.
Thank you again for the opportunity to testify, and I look
forward to your questions.
Chairman Crapo. Thank you, Mr. Mislansky.
Mr. Hopkins.
STATEMENT OF JACK E. HOPKINS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CORTRUST BANK, N.A., MITCHELL, SOUTH DAKOTA, ON BEHALF
OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. Hopkins. Chairman Crapo, Ranking Member Brown, Members
of the Committee, I am Jack Hopkins, president and CEO of
CorTrust Bank, a $780 million asset bank in Mitchell, South
Dakota. As a third-generation community banker, I am pleased to
be here today on behalf of ICBA and nearly 5,000 community
banks. ICBA strongly supports GSE reform, but it is critical to
borrowers and the broader economy that the details of reform
are done right.
Community bank mortgage lending is vital to the strength
and breadth of America's housing market. Community banks
represent approximately 20 percent of the mortgage market, but,
more importantly, our mortgage lending is often concentrated in
rural areas and small towns, which are not effectively served
by large banks. For many rural and small-town borrowers, a
community bank loan is the only option for buying a home.
CorTrust Bank was founded in 1930 and serves 19 communities
in South Dakota and Minnesota, from Sioux Falls to rural
communities. Today I would like to talk about my bank's
mortgage lending and the importance of secondary market access.
CorTrust Bank has about a $590 million portfolio consisting
of approximately 5,500 loans. About two-thirds of our mortgages
are held by Fannie Mae and a smaller number are held by Freddie
Mac and by the South Dakota Housing Development Authority. The
secondary market allows me to meet customer demand for fixed-
rate mortgages without retaining the interest rate risk these
loans carry. As a small bank, it is not feasible for me to use
derivatives to manage the interest rate risk. Selling into the
secondary market frees up my balance sheet to serve customers
who prefer adjustable rate mortgage loans, as well as small
business and agricultural loans, which play a vital role in our
community.
ICBA's approach to GSE reform is simple: Use what is in
place today and working well and focus reform on aspects of the
current system that are not working or that put taxpayers at
risk. ICBA has developed a comprehensive set of secondary
market reform principles.
First, the GSEs must be allowed to rebuild their capital
buffers. Though Fannie Mae and Freddie Mac have returned to
profitability, the quarterly sweep of their earnings to the
Treasury has seriously depleted their capital buffers. Absent a
change in policy, they are on track to fully exhaust their
capita by year end. A draw from the Treasury could trigger a
market disruption. This self-inflicted crisis can and must be
avoided. While Congress debates reform, the FHFA should protect
taxpayers from another bailout. ICBA urges FHFA to follow HERA
and require both GSEs to develop and implement a capital
restoration plan.
Second, community banks must have equal and direct access.
We must have the ability to sell loans individually for cash
under the same terms and pricing available to larger lenders.
Third, there can be no appropriation of customer data for
cross-selling of financial products. We must be able to
preserve our customer relationships after transferring loans.
Fourth, originators must have the option to retain
servicing rights at a reasonable cost. Servicing is a critical
aspect of the relationship lending business model vital to
community banks.
Finally, an explicit Government guarantee on GSE-MBS is
needed. For the market to remain deep and liquid, Government
catastrophic loss protection must be explicit and paid for
through GSE guarantee fees priced at market rates. This
guarantee is needed to provide credit assurances to investors
and will sustain robust liquidity even during periods of market
stress. Without these principles, we could see further
consolidation of the mortgage market.
Any version of reform that effectively transfers the
assets, infrastructure, or functions of the GSEs to a small
number of mega firms could devastate the housing market in
thousands of small communities and put our financial system at
risk of another collapse.
The current system works very well today for lenders of all
sizes and charters. I urge lawmakers to use caution when
evaluating major structural changes to the GSEs or their
elimination. We must not disrupt this very liquid market.
To conclude, ICBA supports housing finance reform so long
as it is crafted to maintain access for small lenders, as
stated in the title of this hearing, not merely on paper but in
the real world.
Thank you again for holding this hearing and for the
opportunity to testify.
Chairman Crapo. Thank you, Mr. Hopkins.
Mr. Purvis.
STATEMENT OF CHUCK PURVIS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COASTAL FEDERAL CREDIT UNION, RALEIGH, NORTH CAROLINA,
ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERALLY INSURED
CREDIT UNIONS
Mr. Purvis. Good morning, Chairman Crapo, Ranking Member
Brown, my Senator from North Carolina, Senator Tillis, and
Members of the Committee. My name is Chuck Purvis, and I am
testifying today on behalf of NAFCU. I currently serve as the
president and CEO of Coastal Federal Credit Union in Raleigh,
North Carolina. I thank you for the opportunity to appear
before you today to talk about the important issue of housing
finance reform.
At Coastal, we have been offering mortgage loans for 40
years. Until 2008, Coastal held most of our mortgages in
portfolio. As demand grew and long-term interest rates fell, we
began to work with Fannie Mae to sell many of our loans into
the secondary market. Without the GSEs, our capacity to lend in
our communities would be outstripped by demand. Our ability to
sell loans ensures liquidity, mitigates our long-term interest
rate risk, reduces concentration risk, and keeps rates
competitive. If not for access to the GSEs, our capacity to
meet local demand would be greatly diminished. Consumers would
suffer from higher rates and fees, more stringent credit
requirements, and overall fewer options. A viable secondary
market is vital to our success as a community lender.
As a credit union CEO, every day I go to work focused on
our members and how Coastal can help put more money in their
pockets. For many, home ownership is what they aspire to, and
Coastal is with them every step of the way.
NAFCU welcomes the thoughtful and practical approach the
Committee is taking on housing finance reform. We have been
active in the housing reform debate and do not believe any
proposals discussed in previous Congresses adequately protect
the needs of community-based lenders.
NAFCU believes there are certain housing finance reform
principles that are important to credit unions and should be
considered in any reform effort. I outline these in detail in
my written testimony, and I would like to highlight a few of
the key points here today.
Of utmost importance, NAFCU believes that a healthy,
sustainable, and viable secondary mortgage market for credit
unions must be maintained. To achieve this, credit unions must
have guaranteed access to the secondary mortgage market. We
believe that efforts to fund any new system must be done in a
way as to limit the cost to smaller lenders and not be a
barrier to access.
NAFCU wants to stress that it is critical that large
institutions not be given control of the market. Their market
dominance would have negative consequences for smaller lenders.
Congress must ensure that does not happen in a reformed system.
We believe that any new system must recognize the high
quality of credit union loans with a fair pricing structure.
Because credit unions originate a relatively low number of
loans compared to others in the marketplace, we do not support
a pricing structure based on loan volume, institution asset
size, or any other issue that will disadvantage our member
owners. As such, credit unions should have access to pricing
that is focused on quality, not quantity.
NAFCU believes that there should be a continued role for
the U.S. Government to issue an explicit guarantee on the
payment of principal and interest on mortgage-backed
securities. The explicit guarantee will provide certainty to
the market, especially for investors who will need to be
enticed to invest in mortgage-backed securities and facilitate
the flow of liquidity through the market. We do not think that
the GSEs should be fully privatized at this time.
A transition to a new system should also be as seamless as
possible. Credit unions should have uninterrupted access to the
GSEs or their successors and the secondary mortgage market as a
whole, in particular through the cash window and small pool
options.
Our partnership with Fannie Mae is critical to Coastal's
mortgage lending function. Our use of Fannie Mae's Desktop
Underwriter on all mortgage loans that we originate ensures
conformity and consistency across our portfolio, whether we
sell the loan or not. Access to such technology must be
preserved in any reforms.
Finally, any new housing finance system must ensure credit
unions can retain servicing rights to loans they make to their
members. Our members turn to us for lower rates and fees and
because they want to work with an organization they trust and
know will provide them with high-quality service. At Coastal,
we retain servicing rights on all of our loans. This was
especially beneficial during the financial crisis as it allowed
us to work with members on their loan to keep them in their
home.
In conclusion, credit unions exist to provide provident
credit to their members. It is vital that credit unions
continue to have legislatively guaranteed access to the
secondary market and fair pricing based on the quality of their
loans.
Thank you for the opportunity to provide our input on this
important issue, and I welcome any questions that you may have.
Chairman Crapo. Thank you, Mr. Purvis.
Mr. Hunt.
STATEMENT OF WES HUNT, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
HOMESTAR FINANCIAL CORPORATION, GAINESVILLE, GEORGIA, ON BEHALF
OF THE COMMUNITY MORTGAGE LENDERS OF AMERICA
Mr. Hunt. I want to first thank Chairman Crapo, Ranking
Member Brown, and the Committee for the opportunity to testify,
and a special thank you to my Senator, Senator Perdue of
Georgia. I am the owner of Homestar Financial. We are
headquartered in Gainesville, Georgia, and have been in
business since 2002. We are the State's largest originator of
FHA purchase and rural housing loans, a major provider of VA
loans for our veterans and active servicemembers, and a Ginnie
Mae issuer. We also sell directly to Fannie and Freddie. We
survived the downturn by originating well-documented loans and
underwriting them carefully.
I am here for CMLA, which represents both community banks
and mortgage bankers, like my own company. CMLA was formed to
give small lenders a voice in a trade group that does not
include large banks.
CMLA is also part of the Main Street GSE Coalition, a
policy group made up of small mortgage lenders, home builders,
civil rights groups, and consumer groups. The coalition
recently issued a set of Common Principles for GSE reform.
Addressing the topic today, we know why the GSEs went into
conservatorship. The HERA legislation in 2008 cured many of the
prior GSE defects, and the Qualified Mortgage Rule addressed
risk from lax standards and recklessly designed products. I
address these issues in more detail in my written testimony.
What remains to be done is to make the level guarantee fee
permanent, as it expires in 2021, and apply this same principle
to up-front risk sharing. We need a permanent Federal backstop
on Fannie and Freddie, and the regulator must set strong
capital. When Fannie and Freddie reach these capital standards,
they should be released from conservatorship. But a fix must
match the problem needing repair and not create new ones.
Small lenders fear that a large, untested, complex housing
finance reform plan will do two things that will be a detriment
to the housing market:
Number one, create marketplace uncertainty that raises cost
for homebuyers, small lenders, and constricts mortgage lending;
Number two, wittingly or unwittingly gives greater market
pricing power to Wall Street and large banks at the expense of
those of us on Main Street.
GSEs should be regulated closely, as they are now, but
capitalized properly, as they currently are not. We agree with
the prudential regulator that capital is needed now, and we all
have a common interest in ensuring that the housing and banking
bailouts of 2008 do not occur again.
Part of the past problem with the recklessly designed
products--excuse me. Part of the past problem with the GSEs was
too little capital. Today they have even less than what they
had in 2008. This makes no sense on Main Street.
Well-capitalized GSEs will be able to balance underwriting
standards and mortgage risk and fulfill affordable housing
obligations. Well-capitalized GSEs that treat all lenders
equally in terms of fees and up-front risk sharing will avoid
concentrations of risk and ensure a flow of affordable mortgage
money to the families we serve in the Southeast and my fellow
CMLA members serve throughout the country.
Economic growth remains slow in the U.S., and housing and
housing construction has certainly underperformed. We need to
move forward, especially as the largest ever population group,
the echo boomers, are now of age to purchase their own homes.
In the history of the country, we have never seen a giant new
generation like this. Home ownership is already at a half-
century low. For a supply of affordable mortgage money for this
generation, we need a safe secondary market independent from
the reach of the biggest banks.
I am also a member of the MBA, a great organization, but on
this crucial topic of GSE reform, I am aligned with CMLA and
other members of this panel. Main Street lenders did not cause
the downturn. We are committed to the continued origination of
quality loans while diligently working to help individuals and
families realize the dream of home ownership. Please consider
the steps I have outlined in my testimony to make this
possible.
Thank you.
Chairman Crapo. Thank you, Mr. Hunt.
Mr. Giambrone.
STATEMENT OF WILLIAM GIAMBRONE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, PLATINUM HOME MORTGAGE, ROLLING MEADOWS, ILLINOIS, AND
PRESIDENT, COMMUNITY HOME LENDERS ASSOCIATION
Mr. Giambrone. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, it is a privilege and honor to
testify before you today. I am Bill Giambrone, president of
Platinum Home Mortgage Corporation, based in Rolling Meadows,
Illinois. I appear before you today as President of the
Community Home Lenders Association (CHLA). CHLA is a group of
small and mid-sized independent mortgage bankers, also known as
``IMBs'', committed to advocating for affordable, accessible
single-family mortgages for families in communities where we
lend. None of our members are taxpayer-backed depository
institutions.
I am here to explain from our perspective why it is
important for the Committee to design a GSE reform bill in ways
that ensure full and equitable small lender access to the
secondary market.
Since the 2008 housing crisis, we have seen large banks
significantly retreat from mortgage lending. We have provided
data in my testimony to show that IMBs have filled the access
to the mortgage credit void that banks left.
While consumers complained about lack of responsiveness
from mega servicers, IMBs provided personalized service to
distressed borrowers in our local communities. So what should
we do next?
CHLA worked with affordable housing and other small lender
groups to develop the GSE reform principles as part of the Main
Street GSE Coalition. We appreciate that you entered that
document in the record at the last hearing.
My written testimony also includes CHLA's detailed GSE
reform plan, a plan that identifies significant taxpayer
reforms that have already taken place, and encourages FHFA to
continue them. In addition, FHFA should take two important
steps which we encourage Congress to support.
First, FHFA should allow Fannie and Freddie to retain a
modest capital buffer. We believe $10 billion each is the
appropriate level. This would address what FHFA Director Watt
called their ``greatest risk,'' their lack of capital.
Second, FHFA should develop and release a capital
restoration plan detailing how Fannie and Freddie could best
recapitalize and exit conservatorship. Congress would only
benefit from having such a plan or road map.
The CHLA plan also includes details on how congressional
GSE reform should be done. The overriding objective is to
ensure broad access to mortgage credit for all qualified
borrowers nationwide while protecting taxpayers. We know that
the well-qualified mortgage borrowers in large urban areas will
be served. The question is whether families living in rural or
other less populated areas will have real access to mortgage
credit and whether low- to moderate-income borrowers will be
served. Small lender access is critical to achieving this goal.
My testimony lists four recommendations for preserving
small lender access to the secondary market:
First, preservation and recapitalization of Fannie and
Freddie using a utility model. This is necessary so the GSEs
can continue their role of facilitating a secondary market for
small lenders.
Second, no new charters should be authorized to carry out
functions that Fannie Mae and Freddie Mac presently carry out.
The likely impact of authorizing new charters would be to grow
the Government, increase risk of taxpayer bailout by creating
more new ``too big to fail'' entities, increased regulatory
risk because regulators may not be able to keep up with the
complexities of the numerous competing entities, and
undermining the utility model concept.
FDIC Vice Chairman Thomas Hoenig recently noted that the
four largest banks have grown from 14 percent of total industry
assets in 1992 to 42 percent today, and that they ``dominate
the industry and increasingly dominate our economy.'' We do not
want this to happen to the mortgage industry. We believe it
will happen if charters are granted to big banks or other ``too
big to fail'' entities like investment banks or insurance
companies.
Opening the door to new charters also raises longstanding
concerns about vertical integration. There is no way to ensure
that new charters will not be influenced or controlled by the
``too big to fail'' institutions, even with only a small
ownership interest in the new entity.
Third, all risk sharing should be done as back-end risk
sharing. Up-front risk sharing could create significant risks
for small lender access and could result in practices such as
volume discounts or vertically integrated investment banks
dealing exclusively with their bank lending affiliate. The
objectives of risk sharing can be fully accomplished by
exclusively doing it by back-end risk sharing.
Finally, pricing, underwriting, and variance parity.
Previous legislative language had language requiring GSE
parity. We agree with this. We also believe equitable treatment
for small lenders should extend to other areas, such as
underwriting variances, reps and warrants, and any proxy for
price advantages.
I appreciate the opportunity to speak before you today, and
I look forward to questions. Thank you.
Chairman Crapo. Thank you, Mr. Giambrone.
I will begin the questioning. As I mentioned in my opening
statement, there are a number of principles of housing finance
reform that I believe share bipartisan support, and I would
like to just go through--there are about five or six I want to
read through here. These are general principles, and I expect
that there is broad agreement on them. So what I am going to do
is just read these principles and ask you if there are any of
you who have any concern or would want to make any
clarifications about the principles that I read. And if not,
that is fine. I have got other questions I want to go on to.
The first principle is we need to preserve the 30-year
fixed-rate mortgage and the TBA market.
Second, we need multiple levels of taxpayer protections,
including strong, robust, loss-absorbing private capital at any
guarantors that sit in front of the Government guarantee.
Third, private capital rather than taxpayers should bear
noncatastrophic credit risk.
Fourth, we must have an orderly transition that utilizes
existing market structure, where possible, and minimizes market
disruptions.
Fifth, the current conservatorships are unsustainable, and
Congress must find a long-term solution.
And then, finally, we need a level playing field to ensure
that small lenders can access the secondary market equitably.
I realize those are broad statements, but is there anybody
who wants to issue some clarification on those? Are those
principles acceptable to each of you? All right. I am taking
that as a yes.
Mr. Purvis. Yes.
Chairman Crapo. All right. Thank you.
Mr. Mislansky. Senator?
Chairman Crapo. Yes, Mr. Mislansky.
Mr. Mislansky. I believe you may have said--and so I would
ask you if you would clarify that--the private capital should
take the catastrophic losses. Is that accurate? I think it was
third principle you were at.
Chairman Crapo. Yes, it should bear the noncatastrophic
credit risk.
Mr. Mislansky. The noncatastrophic. Thank you. So I would
agree with that.
Chairman Crapo. All right. Then let me go directly to you,
Ms. Hughes. In your opening testimony, you stated that you
reject the approach of recapitalizing the GSEs and releasing
them back into the private market with limited changes. Can you
explain a little more about that and why you feel it is
critical that Congress pass GSE reform?
Ms. Hughes. In the current such with them under Government
conservatorship, they have--we have essentially stymied
innovation and lending. Community banks, we rely upon the
secondary market. We rely upon that path to serve our customer
base and deliver those loans to the market. And under the
current structure, neither of the GSEs--speaking of Freddie and
Fannie--are operating in a path to grow and improve the
mortgage market base. And so bringing them back to a position
where they can continue to operate and function as a partner in
the industry would be vital.
Chairman Crapo. All right. Thank you very much.
And, Mr. Mislansky, you mentioned in your opening testimony
that your credit union makes mortgage loans to consumers and
also owns a firm that serves as an aggregator of mortgage
loans. Can you describe those two channels of accessing the
secondary market for small institutions? And then what are some
of the factors that a lender considers in deciding how to
access the secondary market?
Mr. Mislansky. Certainly. So the credit union has what I
would refer to as a typical retail production. We have loan
officers on staff who meet with members, take their
applications, help them through the process, educate them, and
ultimately help them get to the closing table so that they can
become a homeowner or save money with a refinance.
The subsidiary that the credit union owns, myCUmortgage, we
refer to it as an ``aggregator,'' and what we do is we provide
back-office services to credit unions. I mentioned, for
example, in my written testimony that we have one $30 million
institution that is a customer or credit union client of ours,
TopMark Federal Credit Union, which is in Lima, Ohio. Again,
they are a $30 million institution, so certainly by any
standards they would be considered small. They originate $15 to
$16 million most years in mortgages. That is a lot of
originations for an institution that small. And what we do with
them is, again, we help them process and we help them
underwrite, help them close, and then we buy their production.
They do not have the capacity to sell those loans direct--or to
hold those loans on their balance sheet or to even maybe go
direct to Fannie Mae or to Freddie Mac.
So while they need small lender access to the secondary
market, they have chosen the manner of going through an
aggregator such as us and leveraging the expertise that we
bring to the table to help them be able to achieve the same
concept of going direct to a Fannie Mae or a Freddie Mac.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Interesting, thank you. I was not aware of
that.
I will start with Mr. Mislansky, and then I have a question
for everybody. With Wright-Patt's footprint across several
types of communities, help us understand how access to the
secondary market helps you serve communities or borrowers that
are typically ignored by the larger national lenders.
Mr. Mislansky. So there are multiple ways that occurs. One
of the ones that I believe is unique to us in our market, we
serve the core of Dayton. We have several branches, what we
call ``member centers,'' in inner-city Dayton or in the near-
inner city. And in those communities, the home values are
relatively low. You can buy a home in certain markets in Dayton
for $40,000 or $50,000. That might be surprising to those
people in the District where, you know, you would need half a
million dollars to buy a home, or upwards. But we make loans
without any loan limits on the downside, and what I mean by
that is we do not have a minimum loan amount. So if you are a
member of our credit union and you want to buy a $40,000 home,
we will still make a loan to you, where many lenders will have
larger limits--or minimums in place, and they use those
minimums--those minimums prevent urban areas from in some ways
revitalizing.
So what the secondary market----
Senator Brown. And I assume rural areas in, say, northern
Miami County or places that the homes are not quite as
inexpensive as inside of Dayton----
Mr. Mislansky. Correct.
Senator Brown. ----but pretty inexpensive by national
standards.
Mr. Mislansky. By national standards, yes. Those rural
homes, $60,000, $70,000, $80,000 homes. And what we do to help
manage the credit risk, to help manage the interest rate risk,
and to help manage the liquidity risk is we sell those loans in
the secondary market to either Fannie Mae or we are also a
Ginnie Mae issuer.
Senator Brown. OK. Helpful. Thank you.
Let me ask a question of--I will put two questions out
that, Ms. Hughes, if you would start and just go down the line.
GSEs in the past used volume discounts to attract business from
lenders such as Countrywide and Wells Fargo, with large
origination volumes, as you know. The two questions are this,
and I will just work down the group. Is equitable pricing for
small lenders an essential part of the system? And does
inequitable pricing impact mortgage access for your customers?
Ms. Hughes. Yes to both. In the past, it was a competitive
disadvantage for us to have pricing against the larger
institutions. You had more favorable pricing than we could
obtain. And equitable pricing across the board is vital to
continued success.
Senator Brown. OK. Thank you.
Mr. Mislansky.
Mr. Mislansky. Senator, again, I would agree that the
answer is yes to both. And while the competitive issues are
certainly there, I think the other issues to take into account
are when volume pricing is provided to, whether it is a lender
or to any type of entity, what you are trying to do is to
gather more volume, and if the entity can earn more revenue
because they are sending in more volume, does that create an
opportunity for unintended consequences such as you take short
cuts on making the loans? And maybe the credit quality is not
as strong, or maybe the underwriting is not as strong. And I
think that is some of what we saw during the financial crisis
when lenders that no longer exist today, such as a Countrywide
or a Washington Mutual were receiving volume discounts, but the
quality of their paper was not there.
Senator Brown. Thank you.
Mr. Hopkins.
Mr. Hopkins. It definitely put us at a competitive
disadvantage, but I think many times we found that the rates
were fairly similar, so it was really just a transfer of
profits to the large institutions from the GSEs. And so I felt
that they were pocketing the money at the expensive of the
borrowers.
Senator Brown. OK. Thank you. Good comments.
Mr. Purvis.
Mr. Purvis. We think it is important for the mortgage
market in the U.S. to have local community-based lenders,
regardless of whether it is a credit union, a community bank, a
community lender or otherwise. And the only way that will
happen is if the pricing is equitable irrespective of size and
production volumes of the sellers.
Senator Brown. OK. Mr. Hunt.
Mr. Hunt. We certainly believe that pricing equality is
important and must be maintained, and it certainly would be a
barrier to entry even for a new lender if they come in with a
disadvantage to pricing. It is going to be even more difficult
for them to grow their business. So when you put an advantage
out there to a larger lender who already has a foothold in a
marketplace and you have a new competitor or new lender coming
in, an emerging lender that is growing, such as an independent
banker, as my company is, you put that new company at a further
disadvantage so you are going to further disadvantage the
consumers. There is going to be less access because you are not
going to have new lenders coming into the marketplaces easily.
Senator Brown. Thank you.
Mr. Giambrone.
Mr. Giambrone. The short answer would be yes to both. I
would expand upon it saying that many times they do pass it on
in terms of a competitive disadvantage and other times they do
pocket the difference. I think the big difference comes from
the consumer wanting us many times to retain the loan, and if
we are at a price disadvantage, we are unable to do that.
For example, last year, when a large entity had some issues
with cross-selling, we had many of our customers ask us not to
sell their loans to aggregators. And if the pricing is
disadvantaged, we would not have that opportunity. So those
folks would be forced into that scenario. So that was a big
variable.
And the other one, just to add to it, would be this is also
what I mentioned in my testimony, risk sharing, that is another
way that it could be--if it is up-front risk sharing, not back-
end, it could be manipulated in the form of price advantages up
front.
Senator Brown. Thank you.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Welcome to everybody.
A special welcome to a constituent and hopefully a voter.
[Laughter.]
Senator Tillis. Down in North Carolina.
Mr. Purvis, I want to welcome you. I want to ask you a
question. I thank you for your time this morning. I want to
talk specifically about what things this body should consider
with respect to affordable housing in the context of GSE
reform. And in the time allowed, I would like for you to talk a
little bit about what we discussed with the work that you are
doing with Habitat for Humanity over in the Raleigh area.
Mr. Purvis. Sure. Thank you. We need to try to expand
housing and home ownership opportunities to as broad a sector
of the population as we can, and we certainly agree with that
goal.
A couple of things we are doing in our market, we have had
a 100-percent first-time homebuyer program since the late
1990s, and that has been very successful, delinquencies and
losses very low. We work very closely in providing home
financial education at the front end of the process. And so
today we find new individuals and couples who are struggling to
save money for a downpayment because of student loan debt, and
so we are able to meet their desire for home ownership through
that program.
Then on the low-income front, we established a partnership
with Habitat Wade County about 18 months ago to provide $6
million in 2-percent mortgages which does two things: it will
lead to the construction of 60 affordable homes, and then put
60 low-income families into those homes. So we are trying to do
what we can in the local community to expand access to both
home ownership and affordable mortgages to the low-income
community.
Senator Tillis. What do we need to be--and this would be to
anybody who would like to add to it. What should we be
particularly sensitive to that would, within the context of the
reform discussions we are having, that would either be
particularly helpful or harmful to some of the things you are
already doing?
Mr. Purvis. I will answer that. The operational
relationship between us and Fannie Mae to the securities market
works very well today. It has taken decades to build. It is
very efficient. Let us make sure that we do not break that or
lose that in our efforts to reform the system. Otherwise, it
will be disruptive to the market.
Senator Tillis. Yes, sir?
Mr. Mislansky. Senator, I think the other thing that is
sometimes missed with the discussion about Fannie and Freddie
is the standardization that the GSEs brought to the mortgage
market, the uniform residential loan application. All of us as
lenders use that same application. All of us either use Desktop
Underwriter, as Mr. Purvis mentioned, or Freddie Mac's
competing product. There are standardizations about the
documents that are needed to close a loan--to record a loan and
to close a loan. All of those aspects are important to creating
a commodity product in the United States that goes into
mortgage-backed securities.
And so as changes are considered with the secondary market,
I think it is important that the standardization and the assets
that--the people side and the technology side that Fannie and
Freddie have built are considered and how to be maintained.
Senator Tillis. Just one question in my time remaining, and
I have got a lot that we will probably submit for the record so
that we can get more feedback. But I would like the market-
based rationale for an explicit Government guarantee. I think
there was at least in one of your testimonies you think that
that is very important. So for those who may differ, give me
the market-based rationale for that explicit Government
guarantee.
Mr. Hopkins. The market-based guarantee, the explicit
guarantee is obviously going to help keep the rates low for the
homeowner on a going-forward basis because----
Senator Tillis. The Government guarantee.
Mr. Hopkins. The Government guarantee standing behind the
MBS securities, because without that guarantee the rates would
be higher to the consumers. You know, we are talking about
being the final line of defense as really that catastrophic
type of insurance in the guarantee from the Government.
Senator Tillis. So the overall return is the rationale--or
the overall return and market activity is the rationale for the
Government guarantee.
Mr. Hopkins. Keeping it affordable, I think it is part of
the affordability that you are looking for, for particularly
first-time buyers to get into the market.
Senator Tillis. OK. Thank you.
Mr. Chair, I yield back my 12 seconds.
Chairman Crapo. Thank you, Senator Tillis.
Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman. I am
running between hearings here. Thank you all for your
testimony. I am pleased to see the Committee highlighting the
importance of access for small lenders, and I think you all
represent community-oriented institutions working to increase
affordable options for homeowners and borrowers in cities
around the country.
In reading each of your statements, a common theme emerges
in favor of targeted precise reforms over wholesale
restructuring of the system. I think that is a fair statement
to make. And one important benefit of the current system is
that it allows community banks and lenders to sell their loans
to the GSEs through the cash window but retain the servicing
rights to the loans, and in doing so preserve the relationship
with the borrower.
So why is it important for borrowers that lenders have the
ability to retain their servicing rights? And I hope that up to
anyone who wants to speak to it.
Mr. Giambrone. Senator Menendez, a great question, and I
think in my testimony, what I had mentioned earlier, many times
the customers want the local lender. It is a matter of service,
right? If they see us in the store or at the ball field and
there is a little bit of a difference if we are unable to. So,
for example, when there was big pricing disparity, most of our
loans would be sold released, and at this point we are able to
retain more because the pricing differential is not as wide as
it was. So a big factor is simply just the consumers like it
when it is a local lender servicing their loan.
Senator Menendez. Anyone else? Mr. Hopkins.
Mr. Hopkins. Senator, from my perspective, we do servicing
of mortgage loans, and it allows us to keep our customers from
being cross-marketed by some of the larger firms. If we were to
sell to some of the other firms, we might have had accounts
opening that they were not aware of, et cetera. And we look at
it--they can walk into any one of our branches and ask any one
of our people a question, and they can pull it up in front of
them. We have the local service in all of our local branches.
So rather than calling a 1-800 number--I call it ``1-800-who-
cares''--we are there for them. We are there at the individual
branches.
Senator Menendez. Thank you.
Mr. Purvis.
Mr. Purvis. Most of our mortgage borrowers have a lot of
other account relationships with us. They have their checking
account here. They have a savings account. They have an IRA.
They have a car loan. They have a credit card. And so they can
contact us with servicing issues, questions across the entire
relationship with us. It would be very difficult to have to
say, ``I am sorry. I cannot answer your servicing question on
your mortgage because someone else is servicing it.'' So for
us, it is about being responsible for the entire relationship
we have with that member.
Senator Menendez. Those are fine answers.
Let me ask you, and maybe just one or two of you could
answer in the time I have, what challenges would your
institutions face in assisting borrowers that fall behind on
their mortgage, for example, if various new guarantors or
entities establish disparate loan servicing standards. Mr.
Hopkins.
Mr. Hopkins. We do servicing for, as I said, Fannie and
Freddie and our South Dakota Housing Development Authority, and
they do have different requirements for what we can and cannot
do with the borrowers. For instance, South Dakota Housing is a
little more restrictive than Fannie Mae is with their programs
and being able to work with them. So just creating the
complexity of a lot of different servicers, it gets to be
difficult for our staff to keep ahead of it.
Senator Menendez. Let me ask a question of all of you, and
if you can give me a simple yes or no answer, I would
appreciate it. Would you agree that--and I want to follow up on
the Ranking Member's questions. Would you agree that
competitive pricing for loan sales with a securities option is
necessary for small lenders to continue accessing the system?
Yes or no.
Ms. Hughes. Yes.
Mr. Mislansky. Yes.
Mr. Hopkins. Yes.
Mr. Purvis. Yes.
Mr. Hunt. Yes.
Mr. Giambrone. Yes.
Senator Menendez. That is good. We do not get that type of
unanimity around here.
[Laughter.]
Senator Menendez. Would you agree that, in order to
facilitate this competitive pricing, we need a guarantor or
entity that can pool costs across the market and that has a
duty to serve all lenders? Yes or not.
Ms. Hughes. Yes.
Mr. Mislansky. Yes.
Mr. Hopkins. Yes.
Mr. Purvis. Yes.
Mr. Hunt. Yes.
Mr. Giambrone. Yes, but not more than two.
Senator Menendez. Would you be concerned about the
workability and accessibility of a system in which so much of
the credit risk has been transferred on the front end that
there is inadequate revenue remaining to pool costs and serve a
wide range of lenders? Yes or no.
Ms. Hughes. Yes.
Mr. Mislansky. Yes.
Mr. Hopkins. Yes.
Mr. Purvis. Yes.
Mr. Hunt. Yes.
Mr. Giambrone. Yes.
Senator Menendez. I am going stop at three for three, so
thank you, Mr. Chairman.
[Laughter.]
Chairman Crapo. You were on a roll.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman. Thank you to the
panel for being here this morning and answering a lot of
questions.
From my perspective, home ownership is such a big part of
the American dream, and when you think through the net worth of
the average American, what we come to conclude is that your
equity in your home accounts for a significant portion of your
net worth. That means that those folks who have been trapped
out of home ownership have a significantly smaller net worth,
minority communities to speak specifically. And in many ways,
volume discounts by the GSEs could work against access to home
ownership, particularly when so many small banks and credit
unions spend a lot of time investing in their members, to
understand and appreciate the unique lives of those members. It
is an intimate relationship. I served on a credit union board
for about 7 years, and so I have great affinity for our credit
unions.
My question is: How do credit unions and community banks
get squeezed out under volume discounts? For the panel.
Ms. Hughes. Again, it comes back to a pricing disadvantage,
and if you have those larger pricing, the larger institutions
can either undercut you, they can make more profits, it gives
them the opportunity to go out and do more targeted marketing.
And the inability for us to compete in that space makes us a
little uncompetitive.
Senator Scott. Thank you.
Anybody else?
Mr. Mislansky. Senator, I might try to answer the question
a slightly different way, not in terms of price advantage and
what the GSEs would allow in terms of they pay more to one
lender than another, but there was a practice that used to be
in existence where variances were given under the master
service contracts. And what that would mean is that Fannie or
Freddie would have their standard set of rules by which they
would buy a loan. But they may negotiate a special variance
with another lender to either do something or not do something.
So in my market, one of the lenders had negotiated a
variance where they did not require title insurance on loans
that were sold to Freddie Mac, I believe it was. And so what
happened is that that lender was able to have a substantial
price advantage in the marketplace by--if a member compared a
Wright-Patt loan versus this institution, they saved quite a
bit of money. And title insurance, granted, does protect the
lender. It created that sort of advantage.
So it is not just how much they will pay for the loan. I
think it also includes the rules that you can sell loans by.
Senator Scott. Anybody else?
[No response.]
Senator Scott. On the flip side, I am focused on
encouraging sustainable home ownership over simple
homebuyership. One way to do so is the FHFA updating the
accepted credit scoring models at the GSEs. If a family pays
their utility bills or their phone bills on time for a decade,
it ought to count toward their ability to have a home. I will
go to Mr. Purvis. Why is it important that the model be
updated? And who benefits from the capture of this new data?
Mr. Purvis. So the FICO models used by Fannie and Freddie
are decades old. They have certainly been updated over time,
but they are still based on essentially a loan repayment
history and then an ``I gotcha'' because you had a delinquency
or collections item or so forth.
There are new data sources that capture payment history on
cell phone bills, utilities, rent, et cetera, that are not
being used in the determination of creditworthiness by the
GSEs, and we think it is very important for them to begin
updating their credit models to take advantage of those other
sources, which we think will widen the net of folks who become
eligible for conforming mortgages through the GSEs.
Senator Scott. Thank you, sir.
Mr. Hopkins. We do use some of the other scoring models for
our credit card part of our program, and they do work well.
However, I would say that if we are going to on the mortgage
side, we do need some time to make sure we can validate the
data.
Senator Scott. Absolutely.
Mr. Hopkins. Because that will be key to making it work
properly.
Ms. Hughes. Mr. Scott, we actually manually underwrite
loans, consistently deliver these loans to the market. So for
those borrowers that have alternative credit sources, we
already do that. That path already exists. Adding more credit
scoring models to the market would require some data
validation, so some time periods it adds cost. It adds cost to
the borrowers. And if you have lenders who already have that
ability, we can already deliver those loans to Freddie Mac and
Fannie Mae. We can deliver them and insure them under FHA/VA.
The path already exists.
The issue comes into play that pricing is usually different
if you have a manual underwrite. So if the pricing were
equitable, the systems are already in place. The systems that
are in place work for the lenders who are willing to do the
work for the borrowers.
Senator Scott. Thank you very much. Ranking Member.
Senator Brown [presiding]. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. I want to thank
you all for being here.
We cannot have a thriving mortgage market if small lenders
do not have access and the big guys do. You know, it would
produce a competitive imbalance that will drive smaller guys
out of the market, and it was one of my primary concerns the
last time we were considering housing finance reform. So I am
very glad we are on this topic now. I think it is critically
important.
But even if we agree that small lenders and big lenders
should have equal access to the secondary market, it leaves an
important question, and that is, what do we have to do to
provide that equal access to the secondary market? And, Ms.
Hughes, you addressed some of this in your written testimony,
so I want to follow up on this.
As Senator Brown and Senator Scott both noted, one of the
major issues about access for smaller lenders is volume
discounts when the GSEs would give bigger lenders a better
price on a bunch of loans than a small lender would get for a
single loan. So how would you propose that Congress fix that
problem, Ms. Hughes?
Ms. Hughes. Well, I think by simply removing the volume
discounts. In addition to paying up for bigger--you know,
bigger blocs of loans with larger institutions, historically
they would also pay up for low- to moderate-income loans.
Senator Warren. So, basically, you are just saying let us
bar any secondary market entities from offering a volume
discount.
Ms. Hughes. From offering volume discounts, yes.
Senator Warren. And that would help level the playing
field.
Ms. Hughes. Yes, correct.
Senator Warren. Now, another issue that you all have raised
is one, as I read it, of customer service, and you write that
it is not just pricing but that GSEs--other policies were
geared toward higher-volume lenders, and the GSEs showed little
interest in working with smaller, low-volume banks. So how
would you propose to solve that problem?
Ms. Hughes. I also think that the GSEs need to give all
partners in the industry the same level of service.
Senator Warren. Yeah, but you want changes in the law. So I
take it what you are saying is you want Congress to mandate
that any secondary market entity treat all lenders equally.
Ms. Hughes. Correct.
Senator Warren. OK, good. And then a final issue is whether
larger lenders can operate in both primary and secondary
markets, that is, whether or not they can both originate
mortgages and be involved in purchasing and securitizing
mortgages. And I think, Mr. Giambrone, your organization has
raised concerns about this issue. So how would you propose that
Congress address it?
Mr. Giambrone. Well, that is a great question, and I think
in my testimony I explained that the main way to address it is
to leave the entities the way they are today, make it a utility
model, and I think there is a consensus on a utility model,
where it is regulated what they are allowed to charge that is
equal for all.
Senator Warren. But I take it on the vertical integration
point what you are really saying is that Congress should
prohibit any vertical integration, that is, you have got to be
in one space or the other but you do not get to be in both
spaces in terms of origination.
Mr. Giambrone. Correct. That is what we are saying, and I
think the proposals that are on the fringe--I guess it is
opening Pandora's Box, so to speak, if they can own a little
percentage, but not a lot.
Senator Warren. OK.
Mr. Giambrone. And then you have a control issue, and it
may not look like vertical integration but, in fact, it is.
Senator Warren. But I get your point, and that is, your
ideal would be just prohibit people from--or entities from
operating in the primary and secondary market simultaneously.
Mr. Giambrone. Correct.
Senator Warren. Good. So I want to thank you all for your
testimony. I support ensuring equal access to the secondary
market for small lenders, and I think it is critical that we
get the details right on what it is going to take to make that
happen.
But I also want to highlight that ensuring equal access for
smaller lenders involves Government intervention on pricing, on
customer service, and on the types of entities that can compete
in the marketplace. And many of my Republican colleagues
support equal access for smaller lenders, and they seem
perfectly happy to sign off on Government intervention to help
small lenders. But then they turn around and oppose any form of
Government intervention to help lower-income or minority
borrowers. And I do not think you can have it both ways.
We need thoughtful Government intervention to make sure
that the mortgage market works for both small lenders and for
creditworthy low-income borrowers. So I want to see us working
in both spaces at the same time. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo [presiding]. Thank you, Senator Warren.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. I think a lot of
discussion, and good discussion, and actually good consensus
around this lane. But it is like everything else in Washington.
We can sit here and yes, yes, yes, yes, yes, yes, yes, yes,
yes, and then nothing happens. So we need to remain committed
to actually taking that consensus and figuring out how we can
build legislation and how we can bring certainty to small
lenders.
And as you can imagine, North Dakota is a place where small
lenders have thrived for many, many years, and, unfortunately,
for many of my small community banks, they are basically priced
out of the mortgage market by excess compliance costs, which is
another whole issue beyond access to the secondary market.
So we are going to continue to have these conversations,
but I want to--I do not want to recover--I do not want to plow
over the same area--we say that in North Dakota, ``plow''--plow
over the same area that has been already tilled, but I do want
to talk a little bit about duty to serve. In today's market,
many lenders are facing challenges extending mortgage credit in
some of the more rural areas of our State. We can talk about
appraisals, and anyone who wants to weigh in on that, please
do. Both Fannie and Freddie have released their public plans
aimed at helping rural, and underserved markets get more access
to the secondary market. And this is for everyone, and maybe
just go through it quickly. Do you think that the new
underserved market plans will be effective tools in helping
small lenders in rural areas? I will start with you, Ms.
Hughes.
Ms. Hughes. Yes.
Senator Heitkamp. Yes?
Mr. Mislansky. I am not substantially familiar with the
plans, but from what I have read, yes.
Senator Heitkamp. OK.
Mr. Hopkins. I think it goes part way, but as your neighbor
to the south, there is a lot of work to be done.
Mr. Purvis. Yeah, I am not familiar with that plan.
Senator Heitkamp. OK.
Mr. Hunt. I am not familiar with the plan either.
Mr. Giambrone. Yeah, I think it is a good start, and I
think it will help. It will need some tweaking as it evolves,
but I think it is a good plan.
Senator Heitkamp. It is critically important that we
understand how this will operate, because as we are looking at
legislating in this space, things that have been done in the
regulatory sphere or in the implementation, if they are
working, then we need to make sure that we do not take a step
backwards.
How could housing finance systems increase accountability
for helping small lenders in the rural part of our country? And
maybe we will stick to the folks who actually have focused on
rural lending, and we will start with you, Ms. Hughes.
Ms. Hughes. You know, we are a rural area, but we really
have not had an issue with affordability. Our issues do
surround around appraisals, making sure we have timely
appraisals coming in, making sure we have qualified appraisers,
making sure we have appraisers who are not afraid to deal with
the Freddie Mac and Fannie Mae rules. But as far as access to
customers, we have not had a huge issue with that.
Mr. Mislansky. So at our institution that is the
subsidiary, we use the USDA's Rural Development Program quite a
bit, and we are one of the larger lenders, at least in the
State of Ohio, in terms of making that product available to
help people become homeowners. So maintaining that sort of
product would be critical for us to continue serving members in
the rural areas.
Mr. Hopkins. We have a few counties within our State where
we are the only mortgage lender, and I think some of the
complexities and the compliance laws have driven many of the
lenders out of the market. And I think that is part of the
issue we are dealing with here, is it has just gotten to be a
very, very complex market. Some of the appraisal rules and when
appraisals are required have not been updated for decades, and
we are dealing with that. Why does a refinance of a property
really need an appraisal? I mean, some of these things need to
be addressed.
Mr. Purvis. We historically have served primarily members
in Wake, Durham, and Orange Counties, Raleigh, Durham, Chapel
Hill, in central North Carolina, which are urban markets.
Through a merger last year and some other decisions we made
about where we wanted to do business, we are now focused on 16
counties in central North Carolina. Half of that is rural
markets. We are kind of newbies beginning to look at what are
the tools and programs available to help us do mortgage lending
in those rural markets, and there are quite a number of those
in that 16-county market.
Senator Heitkamp. Comments?
Mr. Hunt. As a company who actually is the largest rural
housing lender in the State--and we have been for 6 or 7
years--we certainly serve a number of rural markets throughout
Georgia and into the surrounding States. It is extremely
important that we keep community-based lending, whether that is
a one-person office of an independent mortgage banker in that
community to directly serve it or a community bank. Oftentimes
in rural areas we see a lack of access to high-speed Internet,
and with the current TRID regulations, that makes it more
difficult on those borrowers when they do not have the proper
Internet access to interact with their lender electronically.
Keeping lenders in the communities so the borrower can easily
drive to the actual location is very important, particularly
for low- to moderate-income borrowers who do not have any extra
money to spare.
Senator Heitkamp. OK.
Mr. Giambrone. Yeah, I would say, not to get too deep into
the weeds, but Fannie and Freddie have come out with an
appraisal standard, just to add to the panel, and it is called
``Day 1 Certainty'' at Fannie, where they give you a grade on
your appraisal. I can tell you, in the rural areas it just does
not work. It is a lot bigger process, and you really cannot
rely on it. So if there is a way to change that model, for
example, that----
Senator Heitkamp. We are working on it.
Mr. Giambrone. OK.
Senator Heitkamp. If I could have just a minute to make a
comment, I come from a town of 90 people. I know what
relationship banking is. And I know what it means to be able to
just walk down or drive 10 miles to your banker. We are losing
that in rural America, and we need to figure out how actions
here are driving that.
The other thing people ask me all the time, ``How come I
can get a loan for a $70,000 pick-up but not a $20,000 house?''
It is an interesting--you explain that to people in my State
with a lot of common sense, and you will be talking in circles
by the time you are done. So we are with you. Thank you all for
your input. Thank you for continuing to engage, hopefully, with
this Committee, and we will hopefully get some results.
Chairman Crapo. Thank you, Senator Heitkamp, and you make
some very important points. I appreciate that.
Senator Brown has one more question to ask.
Senator Brown. Yes, thank you for your indulgence, Mr.
Chairman.
Senator Menendez asked you all a question that Mr.
Giambrone gave a slightly different answer. He mentioned there
should be no more than two guarantors in the market, and I
would just like to hear thoughts from the rest of the panel--
and I will start with you, Mr. Hunt--on what you regard is the
right number and why. At what point do multiple entities break
the TBA? If you would give us your thoughts, starting with you,
Mr. Hunt, and moving to your right.
Mr. Hunt. Yes, Senator. So we support--and it is important
that we do not have multiple GSEs that enter the market. It is
already a complex market, and when we speak of the complexity
of the market and you think of a small lender, the more complex
it is, the more your legal costs rise. Your internal costs rise
to try to keep up with all of the differences within the
different GSEs. So as someone else on the panel alluded to
earlier, consistency is extremely important, and the
consistency that Fannie Mae and Freddie Mac provide to the
industry today, the clear and concise underwriting guidelines
that we see from Fannie and Freddie are important for smaller
lenders to be able to operate.
So the more GSEs that we have, the less clarity we are
going to have in the marketplace, and the more complexity we
are going to add to the marketplace. And all of that complexity
is going to continue to be a barrier to entry for small
lenders, and it is also going to increase the cost to the
consumer.
Senator Brown. Thank you.
Mr. Purvis, briefly, if you can.
Mr. Purvis. Yeah, we would expect the guarantors to be
pretty tightly regulated, and unless there is a lot of
flexibility within those regulations, why do you need two,
three, four, five guarantors living with a fairly strict
definition?
Senator Brown. Mr. Hopkins.
Mr. Hopkins. I would say that you had two that worked
fairly well for 70 years until they started straying from their
mission and the regulator allowed them to. We now have a strong
regulator in place. Is it really necessary? They have $400
billion into their common securitization platform and another
$600 billion to go. Do we need to duplicate that cost? I do not
think it is necessary.
Senator Brown. Tim.
Mr. Mislansky. I would agree with what others have said. I
do not know that it is necessary to add and sometimes question
whether it is necessary to have two. And do we need a signal--
if there is a catastrophic Government guarantee behind these,
why do you need necessarily two separate companies doing the
same work essentially?
Senator Brown. Ms. Hughes.
Ms. Hughes. I would agree that we probably do not need more
than two. I do like the idea of two because it does help with
innovation of the products. We know that with the current
regulatory environment we are in, mortgage lending is very
complex, and having partners in the industry who help us
determine the best path to get that done is vital. And having
two systems helps create that innovation.
Senator Brown. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you for your
indulgence. And, excuse me, I have three Committee hearings
going on at the same time, so I am trying to cover them and
listen to some of the conversations that are taking place.
Ms. Hughes, I would like to start with you. In your
testimony you recommended that banks should get a safe harbor
from consumer litigation or CFPB enforcement as it relates to
mortgage underwriting, so long as the bank holds the loan in
portfolio. And my understanding is the thinking behind this is
that a bank would never make a bad mortgage loan if they held
it on their books.
However, the experience that I have seen, coming from
Nevada, and particularly with Washington Mutual and Wachovia,
suggests otherwise, at least for the largest banks. These
failed banks were able to extract significant fee income up
front, and then they would squeeze the borrower with fees if
they fell behind on their payments. And then they could seize
the home and resell it if the borrower went into foreclosure.
We saw that in Nevada. I was the Attorney General there for 8
years, and we saw how devastating it could be.
So my question to you is: Would expanding the portfolio
mortgage exemption to large Wall Street banks open the door to
another Washington Mutual or Wachovia? Wouldn't you agree that
the community financial institution relationship lending model
is different than the model used by big banks?
Ms. Hughes. Yes, I would agree with that. From our
perspective, we--I personally struggle with qualified mortgage
rules because if you are a partner in the industry and you want
your consumers to be successful in home ownership, you have
already underwritten them to a qualified standard. You have
already worked with them. You know that they qualify. And as
they go into--and the benefit of servicing locally is if they
get into hard times, you know them at the consumer level, and
you can work with them to work through the issues where they
have some credit strain.
So I would agree that the community model definitely works
better, and in our case, the regulatory requirements are
actually restrictive and inhibit our abilities to serve our
customers.
Senator Cortez Masto. OK. And so to some extent, you would
agree that narrowly targeting a portfolio mortgage exemption to
an institution like yours makes sense; I mean, if we are really
looking out for those protections.
Ms. Hughes. Absolutely.
Senator Cortez Masto. OK. Thank you. I appreciate that.
Let me move on to Mr. Giambrone. FHA loans are an important
source of credit, particularly for first-time buyers seeking to
enter home ownership. When the FHA Insurance Fund was not doing
well in the aftermath of the Great Recession, the last
administration made a series of changes to shore up its
finances. One such change was requiring mortgage insurance to
be paid over the life of the loan. Previously, borrowers could
stop paying for this expensive insurance once they had 22
percent equity in their house.
Can you discuss the impact of this change in FHA policy?
Has it impeded home ownership, particularly for first-time
homebuyers? And should the FHA reconsider now that the
Insurance Fund is in a much stronger position?
Mr. Giambrone. Excellent question. Thanks for asking it. It
should be reconsidered, yes. When it was done, I think it was
done at a time when the fund was at a low point. That was in
part because they put in the home equity portion. And at this
point I think it actually hurts the fund because people would
be more apt to refinance out of an FHA loan, which is actually
taking funds away from the fund, because they have it for the
life of their loan. So whether it would be back at 78 percent
or 75 percent, it would be better to get rid of the life of the
loan, and on the topic, we also think it is probably time to
lower the monthly as well.
Senator Cortez Masto. Thank you. And let me follow up also,
which is an issue important for me, on affordable housing,
affordable rental housing. In both northern and southern
Nevada, we have an affordable housing crisis, and that includes
rental. In fact, our State has the worst shortage of affordable
and available rental homes in the Nation with only 15 units
affordable for every 100 extremely low income households.
And so let me ask, Mr. Giambrone and Mr. Hunt, your
organization signed on to a letter advocating for policymakers
to consider the affordable rental housing crisis in the context
of GSE reform. Can you discuss the necessity of not only
preserving but expanding our commitment to the National
Affordable Housing Trust Fund in the context of reform?
Mr. Hunt. Affordable housing, you know, is important across
the Nation, so, you know, I believe that it is hard to
determine exactly what the GSEs are going to do for affordable
rental housing. You know, the multifamily side of things I am
not really that familiar with, but that is very important, that
we do provide avenues, you know, to stand up more affordable
housing, and a lot of that actually speaks to some of the
greater issues of the barrier entry to development at this
point in time in the industry, takes much, much more capital. I
am an independent mortgage banker, so I am not answering from
the true banking side, but, you know, we all know it takes much
more capital to enter those markets. And that is slowing the
entry of continued development in the country.
Senator Cortez Masto. I appreciate that.
Mr. Giambrone, do you have any comments?
Mr. Giambrone. Yeah, just briefly, we have supported both
funds. It is our understanding they have done great work in the
past. Rental is a pathway to get to home ownership, and so we
support that. I know the funds--and I am no expert at either,
but whether it be the counseling or the downpayment assistance,
again, or the rental, they have done good work, so we are
supportive.
Senator Cortez Masto. Thank you. I notice my time is up.
Thank you all. I appreciate the comments.
Chairman Crapo. Thank you very much. And I again want to
thank all of the witnesses for being here today and providing
your testimony, both your oral and your written testimony. It
is very helpful as we move forward.
I do look forward to working with Senator Brown and the
other Members of the Committee on this critically important
issue.
For Senators who wish to submit questions for the record,
those questions are due on Thursday, July 27th, and I encourage
the witnesses, as you receive questions from the Senators, to
please respond as promptly as you can.
With that, again, thank you very much, and this hearing is
adjourned.
[Whereupon, at 11:31 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF BRENDA HUGHES
Senior Vice President and Director of Mortgage and Retail Lending,
First Federal Savings Bank of Twin Falls, Idaho, on behalf of the
American Bankers Association
July 20, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
my name is Brenda Hughes. I serve as Senior Vice President and Director
of Mortgage and Retail Lending for First Federal Savings of Twin Falls,
Idaho. I have been with First Federal for over 20 years. First Federal
is a $607 million asset bank which was established in 1915. We
currently have 11 branches and one production office and have 247
employees. We are the largest lender in our assigned lending area and
have originated over $1 billion in mortgage loans in the last 10 years.
I am pleased to be testifying on behalf of the American Bankers
Association on the important topic of GSE reform and community bank
access. The ABA is the voice of the Nation's $17 trillion banking
industry, which is composed of small, midsize, regional, and large
banks that together employ more than 2 million people, safeguard $13
trillion in deposits and extend more than $9 trillion in loans.
In addition to my role at First Federal Bank, I served on Freddie
Mac's Community Advisory Board from 2005 to 2016, serve on ABA's GSE
Policy and Mortgage Markets Committees, chaired the ABA's Mortgage
Markets committee from October of 2012 until September of 2014, and am
the incoming vice chair of the ABA's GSE Policy Committee. I also
currently serve on the CFPB's Community Bank Advisory Council.
First Federal actively delivers loans directly to Freddie Mac and
to the Federal Home Loan Bank of Des Moines and we retain servicing on
these loans. We also work with a handful of other market investors to
whom we sell loans with servicing released. We currently service
approximately 5,000 loans. Like so many banks, both large and small,
access to the secondary market in general, and through the federally
guaranteed secondary market enterprises (GSEs) in particular, is
essential to our ability to meet the mortgage needs of our customers.
The American Bankers Association, through input and deliberation
from banks of all sizes and from all parts of the country, has
developed a set of principles to guide the reform of Fannie Mae and
Freddie Mac, which, as you know, have been in conservatorship since
2008. We appreciate the work this Committee has done thus far, as well
as the opportunity to share our views with you today.
On GSE reform, and on the importance of preserving access for
lenders of all sizes and in all regions of the country, ABA believes
that:
Key shared principles should guide reform efforts;
Without legislative reform, past abuses may be repeated, or
new ones may arise which imperil the mortgage markets and put
taxpayers at risk; and
Reform need not be radical or extreme, but should be
targeted and surgical.
I will elaborate on each of these in turn.
I. Key Shared Principles Should Guide Reform Efforts
ABA has (during the many years that Fannie Mae and Freddie Mac have
been in conservatorship) worked with bankers from institutions of all
sizes and from all parts of the country to develop principles which
should guide reform of the GSEs. For the purposes of this testimony, we
highlight the following principles, and note that many of these are
widely shared among various other trade and industry associations.
We believe that these principles should form the basis for
legislative reform efforts.
1. The GSEs must be strictly confined to a secondary market role of
providing stability and liquidity to the primary mortgage
market for low- and moderate-income borrowers and must be
strongly regulated, thoroughly examined and subject to
immediate corrective action for any violation.
A reformed system must ensure that the GSEs or their successors
stay focused purely on advancing stable, affordable and readily
available secondary market access to the primary market. Shareholder
returns or other investment goals cannot be allowed to drive their
behavior. While a certain level of competition is desirable to ensure
innovation and responsiveness to the market, competition cannot be
allowed to spin out of control and take the GSEs into other businesses
or investment areas. For this reason some have suggested that a public
utility or member-owned cooperative model may be a desirable evolution
for the GSEs. We note only that while ownership structure is one way to
limit and direct activities, strong regulation will also be necessary
to keep GSEs or their successors focused on their defined role,
regardless of what ownership structure is ultimately chosen.
2. In return for the GSE status and any benefits conveyed by that
status, these entities must agree to support all segments of
the primary market, as needed, in all economic environments and
to provide equitable access to all primary market lenders.
The GSEs or their successors, including any potential new
competitors that may be chartered, will benefit from a defined market
available only to them and with a Government guarantee on the
securities that are issued. To ensure that those benefits are available
to all, GSEs must be required to provide access to all primary market
lenders on an equitable basis.
3. Access must also include preservation of the ``To Be Announced''
(TBA) market and both servicing retained and sold options.
The To Be Announced market, also known as the Cash Window, allows
originators to sell loans on an individual basis to the GSEs. This
option must be preserved to ensure access to the secondary market for
lower volume lenders or those who choose for business purposes to sell
individual loans. Similarly, to ensure that originators may continue to
service loans consistent with their chosen business model, flexibility
to sell loans servicing retained or servicing released must be
preserved in any reformed system.
4. Mortgage Backed Securities issued by the GSEs should carry an
explicit, fully priced and fully transparent guarantee from the
Federal Government.
The key benefit conveyed by the GSEs to the primary market is
access to long-term affordable liquidity for mortgage lending. To
preserve that liquidity, the Government guarantee is necessary, but
taxpayers need to be fully compensated for the risks they bear in
providing that guarantee. Fees necessary to support the guarantee must
be charged, and must be transparent so that they reflect the true cost
of the guarantee, and only that cost. Fees should not be assessed to
offset other Government spending or priorities. It may be desirable to
establish a segregated insurance fund to cover potential losses in the
event that the guarantee is tapped in a crisis. Further, to ensure
equitable access, the fees must be assessed equally on all lenders on a
cost averaging basis.
5. The GSEs or their successors must be capitalized appropriately to
the risks borne and regulated to ensure that they remain so in
all market conditions.
Currently, Fannie Mae and Freddie Mac are operating under
conservatorship, with little capital and with all profits being swept
to the U.S. Treasury as compensation for the Federal investment and
risks borne of behalf of taxpayers. It will be essential that going
forward the GSEs or their successors have adequate capital to withstand
market downturns, especially as they will be monoline businesses
subject to regional and national downturns. Capital support for the
guaranteed secondary market can come from a variety of sources,
including indirectly from credit risk transfers, and injections of new
capital from new member/owners/users of the GSEs or their successors
(depending upon the model ultimately chosen by Congress).
6. Regulation of the GSEs must include establishment of sound and fair
underwriting standards for the loans they purchase, and must be
based upon and coordinated with underwriting standards
applicable to the primary market.
Significant underwriting requirements imposed under the Dodd-Frank
Act, most notably Ability to Repay (ATR) and Qualified Mortgage (QM)
rules, while less than perfect, have significantly strengthened
mortgage underwriting in the primary market. Going forward we believe
it desirable that these primary market underwriting requirements serve
as a basis that supports all secondary market activity, regardless of
whether residential mortgages are sold to the GSEs or their successors
or to private label purchasers. As a general matter, mortgages sold
into the secondary market with Government guarantees should meet QM
standards, whereas private label securitizations will only require the
less stringent ATR standard as a baseline, although investors may
establish additional standards at their discretion.
For the primary market, loans originated and held in portfolio
should automatically be granted QM status so long as they meet basic
Ability to Repay requirements and do not run afoul of safety and
soundness regulations. Such loans are inherently conservatively
underwritten as portfolio lenders hold 100 percent of credit risk and
thus will only make loans that have a high degree of ability to be
repaid.
For the secondary market, the so-called QM Patch currently in place
effectively allows Fannie Mae and Freddie Mac to confer Qualified
Mortgage status to any loan they are willing to purchase. As a result,
Fannie Mae and Freddie Mac define the nature and extent of risks to
which taxpayers are exposed. This was a necessary but flawed mechanism
to ensure that the new rules did not overly restrict mortgage credit
when regulations in 2014 subdivided ATR mortgages into QM and non-QM
categories, and was deemed to be manageable as long as the GSEs were in
conservatorship. However, the QM Patch is designated to expire when
conservatorship of the GSEs ends, creating the necessity and
opportunity to revise the QM/ATR rules so that the GSEs or their
successors are not permitted to define what is QM without restriction.
Whatever regulatory definition replaces the open-ended QM patch, GSE
guarantees should be limited to loans that have well-defined and fixed
criteria, and transition to a revised QM designation should be managed
to avoid constricting credit availability. A properly QM requirement to
``earn'' a Federal guarantee is essential to protect taxpayers, and
will help to guide non-QM mortgages to a private label secondary market
without taxpayer exposure.
7. Credit Risk Transfers required by FHFA should be continued and
expanded. Credit risk transfer must be a real transfer of risk
and must be economically viable for the GSEs and the lenders
they serve.
Several mechanisms for credit risk transfers have been critically
important innovations introduced to the GSE model in recent years. They
have helped to bring private market participation back to the mortgage
markets, and have had a real impact on reducing taxpayer exposure to
GSE risks. They should become a permanent feature of secondary market
financing. However, they must continue to be developed in ways that
make economic sense for the GSEs, investors, primary market lenders,
and for the borrowers they serve. They must also truly transfer credit
risk in a permanent fashion to ensure taxpayer protection. To that end,
FHFA (or its successor) must vigorously regulate, examine, and enforce
credit risk transfer requirements.
8. Any reform of the secondary mortgage market must consider the vital
role played by the Federal Home Loan Banks and must in no way
harm the traditional advance businesses of Federal Home Loan
Banks or access to advances by their members.
The Federal Home Loan Banks (FHLBs) have provided mortgage
financing in the form of collateralized advances to their member/owners
for over 80 years. They have performed as intended, ensuring liquidity
even in times of market crisis. Their crisis performance is traceable
in part to mutual ownership status, relatively high statutory capital
requirements and fully collateralized lending. Changes to Fannie and
Freddie may affect the FHLBs, even if unintended or indirect, and
potential effects must be considered, accounted for, and preferably
avoided. Additionally, the FHLBs may have the potential to play an
expanded role in a revised secondary market system, but any expanded
role must be separately capitalized and regulated in such a manner that
it does not put at risk the traditional advance business of the FHLBs.
9. Affordable housing goals or efforts undertaken by the GSEs to expand
the supply of affordable rental housing should be delivered
through and driven by the primary market, and should be
structured in the form of affordable housing funds available to
provide subsidies for affordable projects.
The bright line between the primary and secondary market in the
single family housing finance area should also broadly apply to the
affordable housing and multifamily market. Primary market lenders
should be the originators of these loans supported by access to stable,
long term liquidity from the GSEs. Only in complex originations where
the primary market lacks capacity should the GSEs be involved in direct
financing, and strong regulation and oversight should be employed to
ensure that there is no ``cherry picking'' of deals by the GSEs from
the primary market.
II. Without Legislative Reform, Past Abuses May Be Repeated
Prior to conservatorship, Fannie Mae and Freddie Mac existed as
hybrid companies, in a duopolistic system. They had private
shareholders who profited from risks taken with the implied guarantee
of the Federal Government. Changes to the charters of the institutions
must be undertaken in legislation to remove this private profit/public
risk model. The GSEs should be transformed into cooperatively owned
public utilities or other similar limited purpose, well-regulated
entities.
Early in the conservatorship, Fannie Mae and Freddie Mac were
unable to pay the 10 percent required interest rate on over $180
billion injected by U.S. taxpayers to prevent their collapse. As a
result, the two were de facto nationalized with profits, if any, being
swept to the U.S. Treasury. Under this arrangement, the interest
payments on Government bailout funds has been waived. The GSEs operate
with little and shrinking capital and are, under terms of the
conservatorship, expected to go to zero capital by 2018.
Since returning to a positive cash flow in recent years, the terms
of the conservatorship as amended have remained in place. Though funds
swept to Treasury have been substantial, the amount falls substantially
short of the taxpayers' direct investment plus the waived interest
obligations on that investment. The terms of the conservatorship do not
provide for a cutoff of payments (or for the debt incurred to be
considered repaid) and do not allow for the GSEs to retain earnings to
build capital.
Some have suggested that the GSEs simply be recapitalized and
released back to the private market, with limited changes to their
charters, noting that reforms to the entire mortgage market have
addressed many of the problems that lead to the financial crisis and
the insolvency of the GSEs.
We reject that approach, as it would return us to the untenable
situation of public risk-taking to the benefit of private investors.
Even with current reforms in place it would encourage future abuses and
undue risks to U.S. taxpayers. Instead, legislation should establish
directed and limited activities, strong capital standards and a clear
set of benchmarks for implementing and meeting those standards.
It will also be essential for legislation to firmly establish a
mandate that the GSEs provide equitable access to all primary market
participants, regardless of size or geographic location. As cited in
principle 2 above, in return for the GSE status, these entities must be
willing to serve all primary market participants on an equitable basis
in all market conditions. That includes access to the To Be Announced
market (also known as the ``Cash Window'') with the ability to sell
individual or groups of loans.
In recent years, and primarily as a result of a mandate by the
FHFA, the GSEs have moved to standardized Guarantee fees (G-fees) for
all primary market originators selling to the GSEs. Going back to the
early 2000s, however, great pricing differentials existed, with the
GSEs giving large volume discounts and other preferential pricing to
some institutions. This un-level playing field severely hampered
community banks' ability to compete and serve their communities.
Going even further back, some community banks found it difficult to
do business with the GSEs at all, as their pricing and other policies
were geared toward higher volume lenders and the GSEs showed little
interest in working with smaller, lower volume banks.
It will be necessary to incorporate into statute the mandate that
the GSEs serve all primary market participants equitably in order to
avoid the potential for backsliding.
Some will argue that this can be accomplished via regulation, and
indeed, FHFA has done an admirable job in recent years ensuring
equitable treatment. However, regulators and regulatory approaches can
change over time. While a strong regulator must be part of reform, so
too must be clear statutory guidance in this area.
III. Reform Need Not Be Radical or Extreme, But Targeted and Surgical
Legislation considered by the Senate Banking Committee in the last
Congress envisioned a complete restructuring of the secondary mortgage
market system. That legislative approach was ultimately not able to
gain approval at least in part over concerns that it was too complex
and untested, and that the transition from the current system to a new
one envisioned in the legislation would be too disruptive to the
housing finance system.
Still, the legislative efforts undertaken by the Senate were
helpful in focusing attention on the key services provided by the GSEs
in the past, and in delineating how some of those services could be
separated into component parts, and reassigned in a new system to
reduce risk and create opportunity for greater competition.
Consensus is forming around the view that a limited and controlled
Government involvement in the secondary mortgage market is needed to
ensure the availability of stable, affordable long term financing for
mortgage finance.
Legislation need not recreate the entire secondary market
structure. In fact, guided by the principles detailed above, and
incorporating key elements laid out here, we believe that relatively
tailored legislation that takes a surgical approach to making necessary
alterations to the current system is both desirable and achievable.
In addition to changes to the charters and ownership structure of
the GSEs, the creation of clear, achievable and strict capital
requirements, and the mandate to serve all primary market participants
equitably, these surgical alterations should also include creation of
an insurance fund to backstop the GSEs capital to protect taxpayers
further from again having to bailout the GSEs. While the Government
should stand behind the securities issued by the GSEs, the insurance
fund should stand in front of the explicit Government guarantee to
repay taxpayers to reduce the likelihood that the Government guarantee
is ever drawn upon. The fund should be actuarially sound and modeled on
the FDIC insurance fund.
Conclusion
Americans have relied on long-term, fixed-rate mortgages for
affordable mortgage finance for 70 years. Fannie Mae and Freddie Mac
have facilitated access to this product by providing access to the
capital markets for primary market lenders. Absent aggregation and
securitization provided through the To Be Announced (TBA) market,
access to long-term, lower-rate funding would be far more difficult to
come by for most primary lenders. The Government guarantee provided to
mortgage backed securities issued by the GSEs makes them attractive to
the capital markets ensuring liquidity. All of these elements must be
preserved and remain available to all primary market participants
regardless of size or geographic location.
Congress has an essential role in providing the certainty necessary
to ensure long-term stability of the housing finance system. Just as
the Federal debt market provides the bellwether that makes all private
debt markets more efficient and liquid, an explicit, fully priced,
fully paid-for Federal guarantee for a targeted portion of the mortgage
market will be a catalyst for broader market growth and development.
Congress should not defer action any longer. Nine years of
conservatorship is more than enough.
Thank you for the opportunity to share our views with the
Committee. The American Bankers Association stands ready to work with
Members of the Committee to advance this important set of issues.
______
PREPARED STATEMENT OF TIM MISLANSKY
Senior Vice President and Chief Lending Officer, Wright-Patt Credit
Union, and President, myCUmortgage, LLC, on behalf of the Credit Union
National Association
July 20, 2017
Chairman Crapo, Ranking Member Brown, Members of the Committee:
Thank you for the opportunity to testify on this important topic. My
name is Tim Mislansky, and I am the Chief Lending Officer for Wright-
Patt Credit Union, headquartered in Beavercreek, Ohio, as well as the
President of its wholly-owned Credit Union Service Organization (CUSO),
myCUmortgage. I am also Chair of the Housing Subcommittee of the Credit
Union National Association (CUNA), \1\ on whose behalf I testify today.
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\1\ Credit Union National Association represents America's credit
unions and their 110 million members.
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Wright-Patt Credit Union has approximately $3.6 billion in assets,
and proudly serves over 337,000 members. We are located primarily in
the Dayton and Columbus, Ohio markets. This gives us a unique
perspective on the marketplace as we make home loans available in the
urban core, the suburbs and the rural areas of our markets. We are a
relatively large credit union mortgage lender, and helped 4,631
families in 2015 with $616 million in balances, of which 3,072 were
originated to Wright-Patt Credit Union members, and an additional 1,340
families with second mortgages, totaling $55 million.
In addition to my role at Wright-Patt, I serve as president of our
wholly-owned CUSO myCUmortgage, which provides a variety of mortgage
related services to nearly 200 credit unions. These credit unions range
in asset size from $6 million to $1 billion and are located in 25
different States. Through the CUSO, we facilitated nearly 9,000
closings for $1.2 billion making myCUmortgage one of the largest
aggregators of credit union mortgage loans in the country. These
responsibilities give me a unique perspective of the mortgage lending
needs of small lenders and their members.
As member-owned, not for profit financial cooperatives, many credit
unions offer mortgages to satisfy member demand, and credit unions
represent an increasingly significant source of mortgage credit
nationally. In 2016, more than two-thirds of credit unions were active
in the first mortgage arena, collectively originating over $143 billion
worth of these loans--an amount equal to 7.5 percent of the total
market. By comparison, in 1996 only 43 percent of credit unions were
active and originated a total of less than $20 billion in first
mortgages.
And third party data supports credit unions' growing presence as a
mortgage lender. Most recently, Experian, one of the major credit
reporting bureaus, indicated in a report that in the first quarter of
2017, credit unions accounted for 13 percent of the first mortgages
originated, representing an increase for its 7 percent market share in
the first quarter of 2015. \2\
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\2\ http://www.experian.com/assets/credit-unions/reports/cu-state-
of-credit-report.pdf
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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 member demand for long-term fixed-rate
mortgage products in order to ensure they can continue meeting their
members' mortgage needs.
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 a primary concern of the credit union
prudential regulator. Without a functioning secondary market, credit
unions would most likely severely limit the amount of first mortgage
lending conducted on behalf of their members as they simply would not
have the liquidity to fund and hold the loans.
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, whereas in 1996 only about 16 percent of
mortgage lending credit unions sold loans into the secondary market, by
2016, nearly 30 percent of mortgage lending credit unions sold $56
billion into the secondary market, or 40 percent of total first
mortgages originated by credit unions.
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 sell the core function of serving members to
others. Credit unions may service loans in-house or outsource to a
trusted third-party, but in doing so they maintain a say in how the
loans are serviced. This is especially important when borrowers run
into financial challenges so that the credit union may work to keep the
borrower in their home. Credit unions are also concerned that if they
sell the servicing of the mortgage loan, that the third-party servicers
will 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 $366 billion of first mortgages that
credit unions hold in portfolio, they also service $198 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 are generally locally owned,
community based institutions and tend to be more borrower-centric than
other lenders. This equates to credit unions generally being more risk-
averse than stock-owned or privately owned institutions. The
environment 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, credit unions are member-owned cooperatives and the
financial transactions involving a member's home are typically the
biggest of their lives, credit unions tend to be concerned with not
only the member's ability to obtain the home loan, but also to maintain
the home loan. This leads credit unions 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.
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 as well as unintended consequences on all market participants:
Neutral Third Party
There must be a neutral third party or parties in the secondary
market, with the sole role as a conduit to the secondary market. This
entity must be independent of any firm that has any other role or
business relationship in the mortgage origination and securitization
process, to ensure that no market participant or class of participants
enjoys an unfair advantage in the system. In addition, this party must
be prohibited from holding mortgage loans as individual loans or
mortgage backed securities to avoid additional interest rate risk being
held and managed by the entity. Some proposals have suggested that the
new solution would allow financial companies to own up to 10 percent of
an entity. This idea is troublesome as it could create potential
conflicts of interest and increases the likelihood that larger lenders
could band together to create and own a secondary market entity,
thereby controlling the market and forcing their financial will on
smaller lenders.
Equal Access
The secondary market must be open to lenders of all sizes on an
equitable basis. Access should not only be provided to individual
lenders, but to companies that act as loan aggregators. Despite today's
relatively equal access to the GSEs, some lenders choose to work with
an aggregator, such as a company like myCUmortgage, which buys loans to
pool and sell to the GSEs. These institutions find it a better
financial and operational alternative to partner with an aggregator
than to sell directly to the GSEs. The secondary market must remain
open to both direct lenders and aggregators to allow small lenders to
continue making mortgage loans in the manner they choose to help
consumers with home ownership.
CUNA understands that the users (lenders, borrowers, etc.) of a
secondary market will be required to pay for the use of such market
through fees, appropriate risk premiums and other means. However,
guarantee fees or other fees/premiums should not have any relationship
to lender volume. The fees must be tied to the risk of the individual
loan or pools of loans.
Additionally, CUNA cautions strongly against regimes that require
lenders to retain significant amounts of risk beyond that represented
by actuarially appropriate guarantee fees, as these risk retention
arrangements may have a disproportionately negative impact on small
lenders that are less able to manage such risk or who have the balance
sheet capacity to hold such risk, and could therefore result in less
consumer choice.
One such example is a client of myCUmortgage, TopMark Federal
Credit Union in Lima, Ohio is on pace to help their members with over
$16 million in mortgage loans this year. TopMark is a $30 million
depository, yet manages to generate nearly half its assets per year in
mortgage loans. Without a functioning secondary market, or if onerous
risk retention arrangements were imposed, TopMark may have to stop
helping its members with home financing in just a few short years.
Strong Oversight and Supervision
The entities providing secondary market services must be subject to
appropriate regulatory and supervisory oversight to ensure safety and
soundness by ensuring accountability, effective corporate governance
and preventing future fraud; they should also be subjected to strong
capital requirements and have flexibility to operate transparently and
develop new programs in response to marketplace demands.
Durability
Any 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
any revised system, CUNA is concerned that private capital could
quickly dry up during difficult economic times, as it did during the
financial crisis, effectively halting mortgage lending altogether. In
addition, the introduction of private capital, in a highly regulated
industry, such as mortgage lending, will be discouraged without the
explicit Federal guarantee. The costs and barriers to entry for other
entities will most likely be high and the potential returns may not
justify entry with the guarantee. This could lead to higher risk
lending in order to gain short-term larger profits at great potential
long-term risk as we saw during the financial crisis with exotic
mortgage products and tremendously relaxed underwriting standards.
Financial Education
Credit unions have a noble history of offering a wide variety of
financial counseling and other educational services to their members,
and numerous studies, including an analysis from HUD in 2016, \3\ have
shown that first time home buyers who complete pre-ownership home
buying courses perform statistically better in terms of default risk
and repayment than those who do not. In one case, a study cited by HUD
indicated that those who took pre-purchase education had a \1/3\ less
chance of ending up in default. Any new housing finance system should
emphasize consumer education and counseling as a means to ensure that
borrowers receive appropriate mortgage loans.
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\3\ The Evidence of Homeownership Education and Counseling https:/
/www.huduser.gov/portal/periodicals/em/spring16/highlight2.html.
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Predictable and Affordable Payments
Any new system must include consumer access to a variety of
products that provide for predictable, affordable mortgage payments to
qualified borrowers. Traditionally this has been through fixed-rate
mortgages (such as the 30-year fixed-rate mortgage), but other products
that may be more appropriately tailored to a borrower's specific
circumstances, such as certain borrower-friendly, standardized
adjustable rate mortgages, should also be available.
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 about 80 percent of the time. 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.
Loan Limits
Our Nation's housing market is diverse, with wide variation
geographically and between rural and urban communities. Any new housing
finance system should apply reasonable conforming loan limits that
adequately take into consideration local real estate prices in higher
cost areas. It should also ensure that lower balance mortgage lending
is not discouraged. Many lenders have established minimum loan amounts
as the profitability of a mortgage loan is impacted by loan size. These
smaller loan amounts can be typical in urban areas where the cost of a
home is significantly less. For example, in Dayton, Ohio, a member can
buy a home for less than $50,000 but often cannot find a lender
available to them. Wright-Patt Credit Union does not have minimum loan
amounts as we believe, as a financial cooperative, that we should help
every qualified member buy a home regardless of the size of the home or
the mortgage loan.
Affordable Housing
The important role of Government support for affordable housing
(defined as housing for lower income borrowers but not necessarily high
risk borrowers) should be considered 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.
Credit unions historically have played an important part in low and
moderate income mortgage lending. An analysis of publicly available
HMDA data from 2013 to 2015 shows that 25 percent of credit union
lending is considered ``CRA'' lending. This compares to 23 percent for
non-credit union institutions. While the difference is a relatively
minor 2 percent, it must be remembered that credit unions are not
subject to the Community Reinvestment Act, yet a larger percentage of
our loans are CRA equivalent compared to those lenders that are
primarily subject to CRA.
Mortgage Servicing
In order to ensure a completely integrated mortgage experience for
member-borrowers, credit unions should continue to be afforded the
opportunity to retain or sell the right to service their members'
mortgages, at the sole discretion of the credit union, regardless of
whether that member's loan is held in portfolio or sold into the
secondary market. Consumers align the mortgage loan with where they
make their payment and this impacts their choices in selecting a
mortgage lender. To lose control over this servicing relationship would
be detrimental not only to a large majority of credit union member-
borrowers, but could also result in fewer mortgage choices available to
credit unions and their members, with higher interest rates and fees
alike. Moreover, to the extent 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
Whatever the outcome of the debate over the housing finance system
in this country, the transition from the current system to any
potential new housing finance system must be reasonable and orderly, in
order to prevent significant disruption to the housing market which
would harm homeowners, potential homebuyers, the credit unions who
serve them, and the Nation's housing market as a whole.
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 even a single eligible mortgage, they will be able to sell it
to an issuer of Government-backed securities, directly or through an
aggregator, at market prices, for cash, without low-volume penalty, or
through the TBA market, 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 lending process.
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.
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. 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 guarantor, the
amount of loss on any security that the private capital will be
responsible for (the attachment point), and 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. 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.
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 Federal
guarantor 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 Federal guarantor 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 Federal guarantor 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 private guarantor to the Federal guarantor 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
private guarantor's capital was not depleted. Indeed, a properly
reserved 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 Federal guarantor 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 Federal guarantor to
occasionally operate as a shock absorber, using funds it has collected
from market participants. This would be similar to the way the National
Credit Union Share Insurance Fund (NCUSIF) and the Federal Deposit
Insurance Company (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
guarantors. In other words, the Government should insure the mortgage
bonds but not the mortgage bond issuer. Instead, the Government should
be prepared to quickly pay all legitimate claims not covered by a
private guarantor, and to resolve the private 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.
The entity that provides the Government guarantee should also have
regulatory responsibility. 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 and Other Mortgage Standards
Ultimately, the underwriting standards for a loan to qualify for
inclusion in a covered security should be controlled by the Government
entity responsible for covering losses on such securities. 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 standards established by the Federal issuer, 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 appropriate for an eligible
mortgage: documentation requirements, payment and debt ratio
calculation methods, prohibition of harmful loan features such as
negative amortization, 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 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.
The Federal issuer 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.
This system currently exists with Fannie Mae and Freddie Mac. Their
underwriting standards are the standards of the mortgage industry. A
new or revised system should build upon these standards rather than
start from scratch. In addition, the current GSE system has developed
standardization across the mortgage industry in the Uniform Residential
Loan Application, loan documents, appraisal standards, income
calculation and many other areas. These standardizations have benefited
consumers and lenders by creating consistency and efficiency in the
marketplace and contribute to a well-functioning secondary market. As a
new secondary market is envisioned, these standardizations must be
considered so that standardization in mortgage lending remains. The
unintended consequences of a failure to continue the standardization
would be higher costs to borrowers and a sort of Wild West of mortgage
lending in relation to a secondary market.
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, Department of Veteran
Affairs 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 a violating secondary market participant from
accessing the Federal issuer.
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 the
Federal backstop, 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 enjoy a Federal
backstop, 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 a certain threshold 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 entity, 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 successor
issuer(s), which should also have legal authority to ensure that the
development and implementation of all servicing standards are
reasonable and fairly applied for all servicers; 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.
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 successor
Federal issuer(s) 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, no
entity should 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. 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 successor issuer(s).
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 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 new issuer 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 GSE's and the new issuer 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 issuer 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 new issuer,
or a separate entity made up of all issuers of covered securities. Its
use should be required for all covered securities, which would likely
make it the default for private label securities. Regardless of who
owns it, if its use were required for all covered securities, the new
issuer 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
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 depending on the
nature of the entity created as a successor to the GSEs, credit unions
may need additional investment authority in order to capitalize that
entity, and we encourage the Committee to provide that authority.
Multifamily Housing
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 non-owner 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 legislation has been considered 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 over-pricing 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. A conservatorship is not
meant to last nearly a decade. It is critical that Congress get reform
legislation right as it impacts the overall economy and perhaps more
importantly, the housing needs of Americans. 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 110 million
members, thank you for your consideration of our views.
______
PREPARED STATEMENT OF JACK E. HOPKINS
President and Chief Executive Officer, CorTrust Bank, N.A., Mitchell,
South Dakota, on behalf of the Independent Community Bankers of America
July 20, 2017
Chairman Crapo, Ranking Member Brown, Members of the Committee, my
name is Jack E. Hopkins and I am President and CEO of CorTrust Bank in
Sioux Falls, South Dakota. CorTrust is a national bank with more than
$780 million in assets. As a third-generation community banker, I am
pleased to testify today on behalf of the Independent Community Bankers
of America and nearly 5,000 community banks nationwide at this
important hearing on ``Housing Finance Reform: Maintaining Access for
Small Lenders''. We are grateful for your recognition of the critical
importance of preserving community bank access in any reforms to the
housing finance system. ICBA strongly supports reform, but it is
essential to borrowers and the broader economy that the details of
reform are done right. ICBA looks forward to providing ongoing input on
the impact of reform on community banks and their customers.
Community Banks and the Mortgage Market
Community bank mortgage lending is vital to the strength and
breadth of America's housing market. Community banks represent
approximately 20 percent of the mortgage market, but more importantly,
our mortgage lending is often concentrated in the rural areas and small
towns of this country, which are not effectively served by large banks.
For many rural and small-town borrowers, a community bank loan is the
only option to help families buy a home.
A vibrant community banking sector makes mortgage markets
everywhere more competitive, and fosters affordable and competitive
interest rates and fees, better customer service, and more product
choice. The housing market is best served by a diverse group of lenders
of all sizes and charter types. Nearly 8 years after the financial
crisis, an already concentrated mortgage market has become yet more
dangerously concentrated. We must promote beneficial competition and
avoid further consolidation and concentration of the mortgage lending
industry.
CorTrust Bank was founded in 1930, at the outset of the Great
Depression, and was built, tested and proven under historically
challenging economic conditions. We survived the Great Depression and
numerous recessions since that time, including the most recent
financial crisis, by practicing conservative, commonsense lending and
serving our community through good times and bad. We emerged from the
crisis well-capitalized and our lending has supported the recovery.
CorTrust Bank serves 19 communities in South Dakota and Minnesota, from
Sioux Falls to rural communities with populations of less than 140,
such as Artesian, where we were first chartered under the name Live
Stock State Bank.
Many American community banks have similar stories--some have been
in business for more than 100 years. I fully expect the community bank
business model will thrive in the future, to the benefit of consumers,
communities, and the broader economy.
Residential mortgage lending has been an important component of
CorTrust's business since its founding and has grown more important
over the years. In 1988, we first began to sell mortgages into the
secondary market to access additional funding. Today, we have a $590
million portfolio consisting of approximately 5,500 loans. About two
thirds are held by Fannie Mae, and a smaller number are held by Freddie
Mac and by the South Dakota Housing Authority. CorTrust bank and our
customers depend on our access to Fannie Mae and Freddie Mac.
Fair Access to the Secondary Market
Secondary market sales are a significant line of business for many
community banks. According to an ICBA survey, nearly 30 percent of
community bank respondents sell half or more of the mortgages they
originate into the secondary market. \1\ When community banks sell
their well-underwritten loans into the secondary market, they help to
stabilize and support that market. Community bank loans sold to Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are
underwritten as though they were to be held in the bank's portfolio.
Selling loans to the GSEs allows the community bank to retain the
servicing on those loans, thereby keeping their relationship with that
borrower. Loans that are serviced by locally based institutions tend to
lead to better outcomes for borrowers and their communities. Many non-
GSE secondary market investors require transfer of servicing when they
purchase a loan.
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\1\ ICBA Mortgage Lending Survey. September 2012.
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While community banks choose to hold many of their loans in
portfolio, it is critical for them to have robust secondary market
access to support lending demand with their balance sheets. Selling
mortgage loans into the secondary market frees up capital for more
residential mortgages or other types of lending, such as commercial and
small business lending, which support economic growth in our
communities.
Even those community banks that hold nearly all of their loans in
portfolio need to have the option of selling loans in order to meet
customer demand for long-term fixed-rate loans. Meeting this customer
demand is vital to retaining other lending opportunities and preserving
the relationship banking model. As a community bank, it is not feasible
for me to use derivatives to offset the interest rate risk that comes
with fixed-rate lending. Secondary market sales eliminate this risk.
The ability to sell a single loan for cash, not securities, is critical
to my bank because I don't have the lending volume to aggregate loans
and create mortgage backed securities, before transferring them to
Fannie Mae or Freddie Mac. In addition, I'm assured that the GSEs won't
appropriate data from loans I've sold to solicit my customers with
other banking products.
Recapitalization of the GSEs Cannot Wait
Before discussing reforms to the secondary market, I would like to
highlight for this committee an immediate risk facing the GSEs, the
mortgage market, and taxpayers.
Though Fannie Mae and Freddie Mac have returned to profitability
and have resolved the majority of their defaulted loans, the quarterly
sweep of their earnings to the Treasury--some $265 billion in 8 years--
has seriously depleted their capital buffers. In fact, Fannie Mae and
Freddie Mac have less capital today than when they were placed in
conservatorship 8 years ago and, absent a change in policy, are on
track to fully deplete their capital by year end. When this happens,
one or both companies are likely to require a draw from the Treasury.
This in turn could trigger a market disruption that spikes interest
rates and freezes home purchases and refinancing. This self-inflicted
crisis can and must be avoided. FHFA and the Treasury should protect
taxpayers from another bailout.
Key Features of a Successful Secondary Market
The stakes involved in getting housing-finance market policies
right have never been higher. Housing and household operations make up
20 percent of our economy and thousands of jobs are at stake.
ICBA's approach to GSE reform is simple: use what's in place today
and is working and focus reform on aspects of the current system that
are not working or that put taxpayers at risk. If reform is not done
right, the secondary market could be an impractical or unattractive
option for community banks. Proposals that would break up, wind down,
sell or transfer parts of the GSEs' infrastructure to other entities
would end up further concentrating the mortgage market in the hands of
the too-big-to-fail players, putting taxpayers and the housing market
at greater risk of failure. Further they run the risk of disrupting
liquidity in the $5 trillion housing market that community banks and
homebuyers depend on.
Below are some of the key principles community banks require in a
first-rate secondary market.
The GSEs must be allowed to rebuild their capital buffers.
ICBA believes the first step in GSE reform must be restoring
the GSEs to a safe and sound condition. Regardless which
approach or structure reform takes, the existing system must be
well capitalized to prevent market disruption or additional
taxpayer support in the event of one or both GSEs requiring a
draw from the U.S. Treasury during what's likely to be a
lengthy debate and transition period to any new structure or
system.
Lenders should have competitive, equal, direct access on a
single-loan basis. The GSE secondary market must continue to be
impartial and provide competitive, equitable, direct access for
all lenders on a single-loan basis that does not require the
lender to securitize its own loans. Pricing to all lenders
should be equal regardless of size or lending volume.
An explicit Government guarantee on GSE MBS is needed. For
the market to remain deep and liquid, Government catastrophic
loss protection must be explicit and paid for through the GSE
guaranty fees, at market rates. This guarantee is needed to
provide credit assurances to investors, sustaining robust
liquidity even during periods of market stress.
The TBA market for GSE MBS must be preserved. Most mortgage
lenders are dependent on a liquid to-be-announced (TBA) market
that allows them to offer interest rate locks while hedging
interest rate risk with GSE mortgage-backed securities (MBS)
that will be created and delivered at a later date. Creating
new GSE MBS structures, or using customized capital markets
structures that provide front end credit risk transfers,
generally makes the resulting MBS ``non-TBA.''
Strong oversight from a single regulator will promote sound
operation. Weak and ineffective regulation of the GSEs enabled
them to stray from their primary mission as aggregators,
guarantors, and securitizers. As required by HERA, the FHFA
must ensure the secondary market operates in a safe and sound
manner so taxpayers are not put at risk. It is incumbent upon
FHFA to ensure the GSEs are adequately capitalized commensurate
with their risks and compliant with their primary mission.
Originators must have the option to retain servicing, and
servicing fees must be reasonable. Originators must have the
option to retain servicing after the sale of a loan. In today's
market, the large aggregators insist that lenders release
servicing rights along with their loans. Transfer of servicing
entails transfer of customer data which can be used for cross-
selling. While servicing is a low-margin business, it is a
crucial aspect of the relationship-lending business model,
giving originators the opportunity to meet the other lending or
financial services needs of their customers. Additionally, in
general, consumers receive better service when their loans are
serviced on a local level than when they are serviced by
entities that did not originate their loan and are located out
of their market area.
Complexity should not force consolidation. Under the
current GSE model, selling loans is relatively simple. Sellers
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 exceeding 80 percent
loan-to-value or other guarantees. Any future secondary market/
GSE 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.
GSE shareholder rights must be upheld. Any reform of the
housing finance system must address the claims of GSE
shareholders and respect the rule of law that governs the
rights of corporate shareholders.
ICBA's Way Forward
ICBA's approach to GSE reform is simple: use what is in place today
and is working, and address or change the parts that are not. Our
approach has two parts: reforms that can be accomplished
administratively by FHFA within HERA, and reforms that will require
Congressional action.
Administrative Reforms
FHFA should end the net worth sweep of revenues to Treasury
and, following HERA, require both GSEs to develop capital
restoration plans. These plans would include continued use of
credit risk transfers, provided they meet a targeted economic
return threshold that balances GSE revenue and capital building
needs with prudent credit risk management standards.
FHFA should review and approve those capital plans,
establish prudent risk based capital levels as required by
HERA, and set reasonable timeframes and milestones for
achieving re-capitalization goals.
FHFA should monitor the GSEs' performance against their
respective plans and release each GSE from conservatorship as
they become well-capitalized.
The GSEs should complete construction of the Common
Securitization Platform and issue their respective MBS from the
platform. Ownership/management of the CSP should remain with
the GSEs through the current LLC structure. Expanding access to
the CSP to other entities should be up to Common Securitization
Solutions, LLC (CSS) board, with final approval by FHFA.
Launch of the Uniform Mortgage Backed Security (UMBS)
should be deferred until both GSEs are recapitalized and
released from conservatorship.
Legislative Reforms
Congress should create a catastrophic mortgage insurance
fund to be administered by the FHFA which would be funded
through GSE guaranty fees. The size of the fund should be
determined based on actuarial standards and should be similar
to the FDIC's deposit insurance fund. The fund would stand
behind the explicit U.S. Government guarantee of the GSE MBS.
Congress should change the GSE corporate charters from the
current Government-chartered, shareholder-owned, publicly
traded companies, to regulated financial utilities that are
shareholder owned. All current shareholders should be able to
exchange common and junior preferred GSE shares for a like
amount of shares in the new structures. The Treasury should
exercise its warrants for senior preferred shares of GSE stock
and convert those shares to stock in the new structure. No
dividends should be paid to any shareholders until the company
is deemed well capitalized per its recapitalization plan by the
FHFA. The Treasury should be required to divest itself from its
shares once a company is well capitalized.
The worst outcome in GSE reform would be to allow a small number of
megafirms to mimic the size and scale of Fannie and Freddie under the
pretense of creating a private sector solution strong enough to assure
the markets in all economic conditions. Moral hazard derives from the
concentration of risk, and especially risk in the housing market
because it occupies a central place in our economy. Any solution that
promotes consolidation is only setting up the financial system for an
even bigger collapse than the one we've just been through.
The GSEs must not be turned over to the firms that fueled the
financial crisis with sloppy underwriting, abusive loan terms, and an
endless stream of complex securitization products that disguised the
true risk to investors while generating enormous profits for the
issuers. These firms must not be allowed to reclaim a central role in
our financial system.
ICBA is pleased to see a robust debate emerging on housing finance
reform. A number of serious proposals have been put forth to date--both
from within Congress and from outside--all of which combine promising
features with others that warrant additional consideration and
reworking.
Closing
Thank you again for the opportunity to testify today. It is
critically important the details of reform are done right to ensure
community banks and lenders of all sizes are equally represented and
communities and customers of all varieties are served.
______
PREPARED STATEMENT OF CHUCK PURVIS
President and Chief Executive Officer, Coastal Federal Credit Union,
Raleigh, North Carolina, on behalf of the National Association of
Federally Insured Credit Unions
July 20, 2017
Introduction
Good morning, Chairman Crapo, Ranking Member Brown, Senator Tillis,
and Members of the Committee. My name is Chuck Purvis and I am
testifying today on behalf of the National Association of Federally
Insured Credit Unions (NAFCU). I appreciate the opportunity to share
NAFCU's views on Housing Finance Reform and the importance of
maintaining secondary market access for small lenders. 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 110 million members.
I currently serve as the President and CEO of Coastal Federal
Credit Union in Raleigh, North Carolina. Coastal Federal Credit Union
is a $2.9 billion institution serving 235,000 members with 22 branches
in central North Carolina. Coastal was originally chartered in August
of 1967 to serve employees of IBM in Raleigh. Today, we offer our
employer groups a full range of financial products and services,
including checking accounts, deposit accounts, credit cards, auto
loans, mortgages and home equity loans. We also provide a suite of
ancillary services, including wealth management and residential real
estate brokerage services. In 2016, Coastal received a low income
designation from NCUA, meaning at least 50 percent of our members live
in census tracts that are identified as being low income by the Federal
Government.
I joined the team at Coastal in May of 2001 and became President/
CEO on July 1, 2012. I have 35 years of senior management experience
with credit unions, including serving on the board and as chairman of
the National Credit Union Foundation. I was also recently recognized by
the Triangle Business Journal as the 2016 Business Person of the Year,
the first time that a credit union executive has been honored with that
award.
I go to work every day with three things in mind:
1. How can I make Coastal a great place to work for our 475
employees? If they don't enjoy coming to work, find their work
rewarding, and love to serve, we will not succeed in providing
exceptional service and value to our members;
2. How do we best use our resources to put more money into the
pockets of our members every day? They are who we are here to
serve; and,
3. How do we help make the dreams of our members come true--whether
their first home, first car for a college graduate, or a basic
car to allow someone to work every day and support their
family? These dreams and aspirations are why we exist.
NAFCU's Perspective on Emerging Senate Debate
NAFCU applauds Chairman Mike Crapo and Ranking Member Sherrod Brown
for their continued bipartisan attention to housing policy as the
Banking Committee agenda aggressively pursues housing finance reform
ideas from the perspective of all stakeholders. NAFCU is the only
national organization exclusively representing the interests of the
Nation's federally insured credit unions. NAFCU-member credit unions
collectively account for approximately 69 percent of the assets of all
federally chartered credit unions. My testimony today will explore the
longstanding and 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.
We appreciate the approach the committee has taken to not rush any
efforts on housing finance reform, and to carefully consider the
practical implications of any changes that may be made. Although we
have not endorsed any particular plan at this time, we appreciate the
stakeholder focused approach and the Committee holding this hearing. We
do, however, have several housing finance reform principles that should
be included in any reform effort to guarantee the continued safety and
soundness of the credit union industry.
We believe that efforts to fund a new system be done in a way as to
limit the cost to smaller financial institutions as much as possible.
High costs of entry into, or establishment of, a new system, could be a
major barrier of access for small lenders. To date, we do not believe
that any housing finance reform solution suggested in previous
Congresses fully took into account the needs of small lender access.
For instance, the legislation before the Committee in 2014, S. 1217,
had a $15 billion cap for participation in a new mutual securitization
company designed for smaller lenders. With that model, we remain
concerned that institutions below that arbitrary asset size threshold
would be unable to generate enough volume to ensure liquidity and that
smaller lenders would have a difficult time capitalizing such an
entity. If the Committee were to consider such an approach again, we
believe it should be open to a full range of institutions to ensure
that these concerns are addressed.
We also want to stress that it is critical that large institutions
not be given control of the market. Even though large institutions play
an important role, including serving as a loan purchaser for small
lenders, their market dominance would have negative consequences for
smaller institutions. In many instances, they compete for mortgage
business with small lenders. They may be willing to buy small lender
loans to package them in good economic times, ensuring liquidity for
small lenders. However, in an economic downturn, they may limit this
activity, drying up liquidity for small lenders and reducing
competition for them on the front-end. In that scenario, the consumers
and communities small lenders serve lose access to mortgage credit.
Congress must ensure that does not happen in a reformed system.
Credit Union Principles in Housing Finance Reform Efforts
Recently, as the future of housing finance has become a focal point
in Congress, with the Administration and among regulatory agencies,
NAFCU established an updated set of principles that the association
would like to see reflected in any reform efforts. The objective of
these principles (listed below) is to help ensure that credit unions
are treated fairly during any housing finance reform process. The
principles are:
A healthy, sustainable and viable secondary mortgage market
must be maintained. Credit unions must have unfettered,
legislatively guaranteed access to the secondary mortgage
market. In order to achieve a healthy, sustainable and viable
secondary market, there must be vibrant competition among
market participants in every aspect of the secondary market.
Market participants should include, at a minimum, at least one
GSE, the Federal Home Loan Banks (FHLBs), Ginnie Mae, and
private entities.
The U.S. Government should issue an explicit Government
guarantee on the payment of principal and interest 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 MBS, and facilitate the flow of
liquidity through the market.
The GSEs should be self-funded, without any dedicated
Government appropriations. Although the U.S. Government should
be involved in the secondary mortgage market, the GSEs should
not be Government-funded mortgage programs. The GSEs' fees
should provide the revenue necessary for sustained independent
operation. Those fee structures should, in addition to size and
volume, place increased emphasis on the quality of loans. Risk-
based pricing for loan purchases should reflect that quality
difference. Credit union loans provide the high quality
necessary to improve the salability of the GSEs' securities.
Creation of a FHFA board of advisors. A board of advisors
made up of representatives from the mortgage lending industry
should be formed to advise the FHFA regarding the GSEs and the
state of the secondary mortgage market. Credit unions should be
represented in such a body.
The GSEs should be allowed to rebuild their capital
buffers. Rebuilding capital buffers ensures the safety and
soundness of the GSEs, maintains investor confidence, prevents
market disruption, and reduces the likelihood of another
taxpayer bailout in the event of a future catastrophic market
downturn. The GSEs should be permitted to begin rebuilding
capital slowly over a period of several years.
The GSEs should not be fully privatized at this time. There
continues to be serious concerns that in a fully privatized
system, in which the GSEs are sold off to the secondary market,
small, community-based financial institutions could be shut out
of the secondary market. Any privatization efforts should be
gradual and ensure that credit unions have continued access to
the GSEs and the secondary mortgage market.
The FHLBs must remain a central part of the mortgage
market. The FHLBs serve an important function in the mortgage
market as they provide their credit union members with a
reliable source of funding and liquidity. Housing finance
reform must take into account the consequence of any
legislation on the health and reliability of the FHLBs.
Credit risk transfer transactions should be expanded and
the Common Securitization Platform (CSP) and Single Security
retained. Although there are concerns regarding credit unions'
ability to participate in certain credit risk transfer (CRT)
transactions, the GSEs should continue to expand CRT as well as
initiatives to create deeper mortgage insurance to further
disperse risk among private investors. Credit unions should be
permitted to participate in transactions such as front-end CRTs
through a special purpose vehicle, such as a credit union
service organization or the FHLBs. The CSP and Single Security
have the potential to simplify the sale of loans to the GSEs
and allow greater, more affordable access to the secondary
mortgage market.
The FHFA or its successor should continue to provide strong
oversight of the GSEs and the new system, whatever it may look
like. A strong, reliable single Federal regulator helps to
provide consistency and focus to the GSEs so they can stay on
track with their core missions and objectives. The FHFA helps
maintain safety and soundness in the secondary mortgage market.
A new system should also utilize the current regulatory
framework and GSE pricing and fee structures.
The transition to a new system should be as seamless as
possible. Regardless of whether the GSEs in their current form
are part of a new housing finance system, credit unions should
have uninterrupted access to the GSEs or their successor(s) and
the secondary mortgage market as a whole, in particular through
the cash window and small pool options.
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. 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)). Congress established
credit unions as an alternative to banks and to meet a precise public
need-a niche credit unions fill today for nearly 110 million Americans.
Despite the passage of over 80 years 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 5,700 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. Since the financial
crisis of 2008, consolidation of the commercial banking sector has
progressed at an increasingly rapid rate. 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 economic crisis, and
an examination of their lending data indicates that credit union
mortgage lending outperformed bank mortgage lending during the recent
downturn. This is partly because credit unions did not contribute to
the proliferation of sub-prime loans. Before, during, and after the
financial crisis, credit unions continued to make quality loans through
sound underwriting practices focused 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 focus 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 has outpaced banks since the downturn and how credit
unions have fared better with respect to real estate delinquencies and
real estate charge-offs. 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.
A primary concern of credit unions is continued unencumbered access
to the secondary mortgage market. This includes adequate transition
time to any new system. 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 low number of
loans compared to others in the marketplace--federally insured credit
unions had just over 7 percent of the first mortgage originations in
2016 (see chart below)--we do not 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. As such, credit unions should have access to pricing that is
focused on quality not quantity.
Recent trends in asset portfolios, coupled with the current
interest rate environment, present a unique challenge to credit union
management. Until recently, interest rates had fallen to record lows,
credit unions experienced vigorous share growth, and credit union
participation in the mortgage lending arena increased to historic
heights. Even as interest rates have begun to rise again, credit union
first mortgage originations have continued to grow. Between 2007 and
2016, the credit union share of first mortgage originations expanded
from 2.6 to 7.5 percent. The portion of first mortgage originations
sold into the secondary market increased overall from 26 percent in
2007 to 40 percent in 2016, according to National Credit Union
Administration (NCUA) call report data (see chart below), although it
has leveled off in recent years.
Credit unions hedge against interest rate risk in a number of ways,
but selling products to be securitized and sold on the secondary market
remains a key component of safety and soundness. Lenders must have
guaranteed 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. Not only does this
allow credit unions to better manage risk, but we are also able to
reinvest those funds into their membership by offering new loan
products or additional financial services. A 2015 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 40 percent of
total loans. 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 2015, the portion of
credit union first mortgages that were sold to Fannie Mae grew from 28
percent to 49 percent. The portion sold to Freddie Mac fell slightly
from 13 percent to 11 percent over the same period. Credit unions sold
a total of 60 percent of their first mortgages sold to the secondary
market to the GSEs in 2015. 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 59 percent in 2015.
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. Any changes to these standards that result in decreased
conformity could make it harder for credit unions to sell loans onto
the secondary market as they do not have the economies of scale that
larger market participants enjoy.
Mortgage Lending at Coastal
Coastal has been offering mortgage loans for the past 40 years.
Until 2008, Coastal held the majority of our mortgages in portfolio. As
demand grew and long term interest rate risk came into play, we began
to work with Fannie Mae to sell many of our loans into the secondary
market. From 2008 to 2009, we experienced a 300 percent increase in the
value of loans sold to Fannie Mae.
It's important to note that Coastal never participated in the type
of risky mortgage lending that contributed to the economic downfall of
2008 and 2009. We did not get into negative amortizing ARMs, ALT-A
loans, subprime loans, or ``no income, no job, no assets (NINJA)''
loans. The demand existed. We had members who asked for these types of
loans, but we took our fiduciary responsibility to our members
seriously and would not put them into a home they could not
realistically afford. As a result, we only experienced 70 foreclosures
over the past decade, including a period of time where other lenders
saw double-digit percentages of their portfolio going bad.
Since 2011, Coastal has made more than 11,700 mortgage loans, for a
total $2.25 billion. During that same time period, we sold 72 percent
of those loans directly to Fannie Mae, because they offer competitive
pricing for affordable lending to our members, diverse mortgage
products, and allow us to maintain the servicing relationship with our
members.
We currently service 10,738 mortgages valued at nearly $1.8
billion. Of that, 7,310 loans valued at $1.2 billion are with Fannie
Mae. To us, these are more than just loans. Each one represents a
family in a home, and each mortgage application is a new opportunity to
help make a family's dream of home ownership come true. Even though
most of our mortgage business is within central North Carolina, we do
have members in all 50 States.
Within our primary 16-county market footprint, Coastal ranks 10th
in market share out of 620 lenders. We achieve this, in part, because
of the trust we've built with our membership and the value we return to
them. We receive volumes of positive feedback from our members in
regard to our mortgage process and our servicing.
We firmly believe that access to affordable credit for homebuyers
is essential to middle class financial well-being. Even people who rent
can benefit. We represent a market that's home to some of the highest
rents in the State, in part due to supply constraints in a high-demand
market. By continuing to make home loans accessible and affordable, we
can help do our part to relieve some of that market pressure.
But, without the GSEs, our capacity to lend would be outstripped by
demand. The GSEs benefit consumers because access to the secondary
market and access to capital provides us with additional lending
capacity. Our ability to sell loans, versus keeping them on our balance
sheet, also mitigates our long term interest rate risk, reduces
concentration risk, and keeps rates competitive. If not for access to
the GSEs, our capacity to meet local demand would be greatly
diminished, and local consumers would suffer from higher rates and
fees, more stringent credit requirements and overall fewer options. I
urge you to keep this in mind as you consider reform.
Coastal serves many members who are seeking to buy their first
home. We feel an obligation to help make that first mortgage
affordable, and are committed to walking members through the home-
buying process. We offer a variety of seminars and educational
resources for first-time homebuyers, including Fannie Mae's Framework.
Coastal has been making special first-time homebuyer loans since
the 1990s. We currently offer two first-time homebuyer mortgages, a 30-
year fixed-rate loan and a 7/1 adjustable rate loan. The program is
available to home buyers who have not owned a home in the last 3 years.
The product conforms to Fannie's standards, so only one spouse needs to
be a first-time home buyer. Our first-time homebuyer mortgage is a 100
percent loan with no mortgage insurance, no income or area limits and
up to a $300,000 sale price. We currently service 787 first-time
homebuyer loans, totaling $124 million. Our 60-day delinquency rate on
those loans is below 1 percent.
In 2016, due to the increasing number of extended and multi-
generational households in our market, we began offering the Fannie Mae
HomeReady' loan. HomeReady' allows consideration
of income from non-borrower household members (relatives or non-
relatives) as a compensating factor to allow for a debt-to-income (DTI)
ratio above 45 percent and up to 50 percent. It also considers non-
occupant borrowers, such as parents.
We are also a member of the Federal Home Loan Bank of Atlanta, and
through them, we have access to additional funding to allow us to
continue to make home loans at times where loan demand outstrips
deposit growth. Currently, we have $110 million outstanding with the
FHLB.
Term advances from the FHLB are also a tool to help us manage
interest rate risk created by longer term loans.
Key Elements of the Current System
Our partnership with Fannie Mae is critical to Coastal's mortgage
lending function. We use Fannie's Desktop Underwriter'
platform to underwrite all mortgage loans that we originate. This
ensures conformity and consistency across our portfolio, whether we
sell the loan or not.
Our reliance on Desktop Underwriter' provides Coastal
with a level of efficiency that we might not otherwise have.
Additionally, it enhances the member experience by automating and
expediting parts of the loan process. If governmental reform creates
any significant changes to the Desktop Underwriter'
platform, it would have widespread effects on our operations.
Fannie Mae has recently launched a new program, Day One
CertaintyTM, which automates and expedites income and
employment verification as part of the application process. This speeds
up the mortgage underwriting process by as much as ten business days,
adds a level of data integrity, and greatly reduces the risk of fraud.
Coastal participated in the pilot program for Collateral
Underwriter' for property evaluations, one of four segments
of the Day One CertaintyTM program.
As Congress considers reform, access to such technology must be
preserved in any new model. The GSEs' tools provide critical benefits
to small lenders. Desktop Underwriter' and Day One
CertaintyTM are important tools for Coastal and we want to
ensure stability with these platforms. There are some opportunities for
improvement, including updating the Agency's antiquated credit risk
scoring platform, which would subsequently lessen some punitive results
in loan level pricing adjustments borne by the consumer.
The current aggregation model at the GSEs has also had benefits for
credit unions. We do not want to see a regression to the previous
aggregation model used before conservatorship--where market share
agreements with the largest lenders created underwriting exceptions and
lower guarantee fees based on volume, not on the underlying loan risk.
This priced out smaller lenders and forced them to sell to larger
lenders, instead of directly to Fannie Mae. These practices created
huge volumes of underpriced risk that were a part of the culture and
precipitated the financial crisis. We want a system that ensures equal
market access for lenders of all sizes and business models and
maintains a deep, liquid market for long-term options. Furthermore,
even though Coastal 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.
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 system, 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 any proposal 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 Fannie Mae and Freddie Mac's ability to securitize MBS
is shut down. One way to accomplish this may be to have the two
entities exist in a winding down capacity during the early stages of a
new system.
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. Many consumers turn to credit unions for lower rates and more
palatable fee structures, but 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 Coastal, we 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.
Underwriting Criteria in Any New System
NAFCU has concerns about using the ``Qualified Mortgage'' (QM)
standard as the standard for loans to be eligible for the Government
guarantee, as was proposed in previous legislation before the
Committee. We believe underwriting standards may be best left to the
new regulator and do not think that they should be statutorily
established. 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 do not fit
into all of the parameters of the QM box. Using the Consumer Financial
Protection Bureau's (CFPB) QM standard for the guarantee would continue
to discourage the making of non-QM loans.
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.
Regulatory Relief and Mortgages
NAFCU supports changes to QM standard to make it more amenable to
the quality loans credit unions are already making. We would like to
highlight two such changes:
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. The following is
a real-life example of a loan we would approve to hold in portfolio
that we would not approve now:
Nonconforming loan (jumbo)
53 percent LTV
Existing long relationship
Substantial deposit relationship
810 FICO score
DTI is above 43 percent creating a non-QM loan
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 support changes to the TILA/RESPA requirements, such
as removing the requirement to deliver the Closing Disclosure (CD) 3
business days prior to closing. There are myriad reasons why this issue
creates hardship for all involved. A ``real-life'' situation includes a
final property inspection triggering ``last minute'' changes to the
contract that are in the best interest of the borrower. Because of the
rigid, mandatory, no exception nature of the requirement, these
examples ``re-start'' the timer and push back closing affecting moving
schedules, utility setups, etc. There may also be examples where a
borrower may be able to get better terms on rates, but cannot afford to
move the closing and cannot waive this requirement.
Another frustration relates to third party fees. The lender is
required to know exactly what third parties will charge and if the
actual invoice exceeds the tolerance, the lender must pay the
difference. Situations arise where an inspection or appraisal may be
more involved than originally thought and vendors may justifiably incur
more expenses to perform the work. Again, the rigidity of the rules
requires the lender to absorb these amounts.
Conclusion
In conclusion, NAFCU appreciates the Banking Committee's bipartisan
approach to housing finance reform and the inclusive nature of the
process. As you consider reform, we urge you to adhere to the credit
union principles outlined in my testimony. Whatever approach is taken
to reform the system, it is vital that credit unions continue to have
unfettered 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 an explicit Government guarantee to help stabilize
the market.
Thank you for the opportunity to provide our input on this
important issue. NAFCU and our member credit unions look forward to
working with you and your staffs as housing finance reform legislation
moves through the legislative process.
I thank you for your time today and welcome any questions that you
may have.
______
PREPARED STATEMENT OF WES HUNT
President and Chief Executive Officer, Homestar Financial Corporation,
Gainesville, Georgia, on behalf of the Community Mortgage Lenders of
America
July 20, 2017
On behalf of the Community Mortgage Lenders of America (CMLA) I am
pleased to submit testimony to the Senate Committee on Banking,
Housing, and Urban Affairs on Housing Finance Reform. CMLA is a trade
group representing small lenders that serve the housing finance needs
of their customers. CMLA's members, which include both mortgage
companies and community banks, are active originators of loans that are
sold to, and securitized by, both Fannie Mae and Freddie Mac
(collectively the ``GSEs'').
None of CMLA's members received TARP bailout money and among our
members there were very few loans from either GSE or FHA that they were
required to repurchase.
CMLA is a member of the Main Street GSE Reform Coalition, which
recently published a set of Common Principles for GSE reform. The
Common Principles emphasize the need for strong capitalization of the
GSEs, equal treatment and access for all lenders and fulfillment of the
GSEs' affordable housing obligations.
Summary of CMLA Housing Finance Reform Recommendation
We are pleased that the Committee is moving forward on the subject
of housing finance reform. Since the depths of the 2008 financial
crisis, the U.S. mortgage market has made great strides in addressing
the issues that created and drove the crisis. The last significant
piece of unfinished business from the crisis is to resolve the status
of Fannie Mae and Freddie Mac. In order to best serve the home finance
needs of American consumers we need to allow these two vital sources of
liquidity for the home mortgage market to emerge from their nearly 9
year-long conservatorships. Listed below are CMLA's recommendations of
how to accomplish the final steps in housing finance reform:
The Housing and Economic Recovery Act of 2008 (HERA)
addressed many of the shortcomings and lapses that led to the
financial failure of Fannie and Freddie, and the Qualified
Mortgage provision in Dodd-Frank successfully addressed lax
underwriting standards and poorly designed products. However,
there are a few important steps left to be accomplished;
The completion of housing finance reform includes both
administrative actions and targeted, specific Congressional
legislation;
The Federal Housing Finance Agency (FHFA) must exercise its
authority under HERA to set capital standards for the GSEs and
oversee and approve the GSEs creating and executing a
recapitalization plan to build a strong base of private capital
to provide financial stability and reduce taxpayer risk;
Congress should make permanent the mandate of equal fees
for all lenders and the FHFA's authority to regulate the
guaranty fees charged by the GSEs as well as extending these
two safeguards to upfront risk sharing arrangements as well, in
order to ensure a level playing field for America's homebuyers
and all lenders, and
Congress must also provide a Federal backstop for the GSEs,
so their MBS will continue to command strong prices in the
marketplace, which translate to affordable interest rates for
home buyers and continued availability of 30-year fixed-rate
loans
State of the Mortgage Market
The state of the mortgage market in the U.S. in 2017 is good with
some improvements definitely required. Lenders are projected to
originate approximately $1.6 trillion in single family mortgages this
year. Home values are on a steadily upward trajectory and many
individuals and families are able to obtain financing to purchase their
home of choice. Interest rates for a 30-year fixed-rate mortgage remain
in the 4 percent range and the credit performance of existing loans is
strong.
According to Core Logic, a California-based real estate data and
analytics firm, delinquency and foreclosure rates among existing home
loans are at quite moderate levels, and down from a comparable period
in 2016. Both early (30 day) and late stage delinquencies (120 days+)
are down .5 percent since the comparable period in 2016, while loans in
foreclosure have declined from 1.0 percent in 2016 to 0.7 percent in
2017. All of these delinquency and foreclosure statistics are a
fraction of the comparable numbers during the height of the financial
crisis and its immediate aftermath in the 2008-2010 period.
Credit parameters have loosened somewhat in the past year, but
remain more stringent than they were early in the century prior to the
relaxation that led to the financial crisis. Fannie Mae, for example,
recently announced that the maximum debt to income ratio they would
accept on loans they purchase, would be 50 percent. Previously the
maximum was 45 percent, with 50 percent acceptable only under certain
qualifying circumstances.
However, there has been little to no increase in mortgage risk as a
result of these modest loosening in credit parameters. As measured by
Core Logic's Housing Credit Index, which tracks the risk inherent in
mortgages being currently originated, the risk in mortgage being
originated today is equivalent to the risk inherent in mortgages
originated early in this century, which was a period of low risk and
robust credit performance for single family mortgages in the U.S. By
comparison the Housing Credit Index in the first quarter of 2007, at
the height of the pre-crisis relaxation of underwriting standards and
origination of exotic mortgage products, was more than double what it
is today.
To be sure, there are some issues in today's market that need to be
addressed. Credit parameters, while having loosened somewhat, are still
stricter than they were in the 2000-2003 time period. That early 21st
century time period is seen as having had the optimum balance between
ample credit availability and strong underwriting standards. In
addition, the supply of homes, both existing and new, is quite
restricted in many major markets. Overhanging all of this is the
continued low rate of home ownership, which in turn has contributed to
sharp increases in rents as potential buyers remain as tenants and
compete for rental housing with new entrants.
A significant, and from the standpoint of small lenders, beneficial
change in the mortgage marketplace since the immediate aftermath of the
financial crisis has been the lessening of market share concentration
among the big bank lenders. In 2011 three big bank lenders accounted
for 50 percent of all residential mortgages in the U.S. Today the
market share held by those three same banks is just above 20 percent.
What has changed is the market share of small and mid-sized independent
lenders, which has grown to 40 percent plus in 2016 and the first half
of 2017.
The growth in the independent lender segment has translated into
more choices for consumers and less risk concentration among a few
large lenders, both positives for the marketplace and for borrowers.
State of Mortgage Market Reform
The shortcomings that led to the GSEs' conservatorship are well
known. Too little capital, a weak and ineffective regulator, executive
compensation that encouraged excessive risk taking and discounted
guaranty fees to large lenders that led to a concentration of risk,
were the four primary causes. Fortunately, HERA corrected three of
these issues and legislative action by Congress in 2011 corrected the
fourth, at least temporarily.
HERA created FHFA as a robust regulator, armed with sufficient
authority to oversee the operations of the GSEs. The legislative change
in 2011 authorized FHFA to regulate the guaranty fee charged by the
GSEs and mandated equal guaranty fees for all lenders for a 10-year
period ending in October, 2021.
FHFA's actions, as both regulator and conservator we believe, have
fulfilled the expectations of HERA's drafters. Under FHFA's direction
and control Fannie Mae and Freddie Mac have been steady, dependable and
significant sources of liquidity for the conventional mortgage market.
The credit quality of the mortgages purchased and securitized by the
duo have been outstanding, as has the performance of the mortgages
backing the GSE-issued securities. Fannie Mae and Freddie Mac are once
again the linchpins of the conventional mortgage market in the U.S.
FHFA has also moved to address some issues that have made the
mortgage market less efficient and more expensive for consumers--
notably the price difference between Freddie Mac and Fannie Mae
securities. As noted recently by the Urban Institute, the price gap
between the Freddie Mac and Fannie Mae mortgage backed securities has
largely disappeared. This price gap, with Freddie Mac securities
commanding a lower price in the capital markets, had persisted for many
years, well prior to conservatorship. Now with the product uniformity
and other operational efficiencies introduced by FHFA, as well as the
promise of a common securitization platform and a single security, have
led to the market pricing the securities on a relatively equal basis.
The other major shortcoming that FHFA has not addressed, though
HERA provided it with ample authority to do so, is the inadequate
capitalization of Fannie Mae and Freddie Mac. HERA authorizes the FHFA
Director to set both minimum capital standards and risk-based capital
standards, ``to the extent needed to ensure that the regulated entities
operate in a safe and sound manner.''
Unfortunately, with Fannie Mae and Freddie Mac in conservatorship,
FHFA has chosen to not exercise its capital authority under HERA. In
fact, the Preferred Stock Purchase Agreements (PSPAs) between the U.S.
Treasury and each GSE specifically ignore the capital provisions of
HERA and require each entity to reduce its capital level each quarter
until it reaches zero in January 2018. We find this to be a reckless
and ill-advised action put in place by the former administration and we
shall address this issue further, later in this testimony.
FHFA has also acted to ensure that executive compensation provides
the appropriate incentives to keep GSE management focused on fulfilling
their mission of providing ample liquidity to the mortgage market and a
flow of affordable housing finance for lenders to make available to
consumers.
The fourth shortcoming, the discounting of guaranty fees tied to
lending volume, was a serious misstep by Fannie and Freddie. The
combination of a 10-year grant of statutory authority to FHFA and
strong, effective administrative action, have eliminated this issue.
In the pre-crisis era both Fannie Mae and Freddie Mac utilized the
technique of discounted guaranty fees in return for exclusive business
arrangements with large lenders as a competitive tool to garner larger
loan volumes.
This discounting of guaranty fees to large lenders had several
detrimental effects on the financial stability of the GSEs and the
mortgage market. Through the discounts the large lender recipients were
able to translate their favorable pricing into a competitive advantage
in the primary mortgage market that allowed them to underprice small
lenders and gain larger market share for themselves. As pointed out
above these larger market shares led to a dangerous concentration of
mortgage originations among a handful of lenders. As we pointed our
earlier in the testimony, in 2011 three big bank lenders commanded a
combined market share of 50 percent.
Smaller lenders were not offered the same pricing by either Fannie
Mae or Freddie Mac and thus could not offer these lower prices to the
consumers whose financing needs they served. Small lenders could obtain
not-quite-as-favorable pricing by agreeing to sell their closed loans
to one of the large lenders who enjoyed the discounted guaranty fees.
The downside for small lenders was that large lenders would only
purchase loans from small lenders bundled with the loan servicing
rights. So, small lenders forfeited the opportunity to establish a
long-term customer relationship. Small lenders also were deprived of
the opportunity to build additional financial stability for their
companies through the ongoing income stream from loan servicing fees.
The situation is very different today for small lenders. With the
equal pricing policy mandated by Congress and implemented by FHFA,
small lenders pay the same guaranty fees as large lenders. Small
lenders can compete on an equal pricing basis with large lenders in the
primary mortgage market with the option of selling the loan directly to
Fannie Mae or Freddie Mac and retaining the servicing rights to the
loan. Retaining the loan servicing rights allows small lenders to build
a long-term relationship with their customers and to create greater
financial stability for their company with the ongoing income from loan
servicing fees.
Since the major shortcomings that led to the GSEs' conservatorship
have been addressed through legislative action by Congress and
administrative action by FHFA, what remains to be done? What can be
accomplished administratively, by FHFA and/or other agencies or
departments in the executive branch and what further action do small
lenders believe Congress needs to take?
Scope of GSE Reform That Remains To Be Accomplished
There are several critical and specific actions that remain to be
taken in order to complete housing finance reform. Some of these
actions can be accomplished administratively and some require targeted,
narrowly scoped Congressional legislation. Among the required actions
are the following:
Congress must make permanent FHFA's authority to regulate
the guaranty fees charged by Fannie Mae and Freddie Mac;
continue the prohibition on discriminatory or unequal pricing
and extend that administrative authority and prohibition to
upfront risk sharing transactions and all other actions that
may foster or encourage vertical integration of the primary and
secondary mortgage markets;
Congress should make permanent the current PSPAs as an
explicit Federal backstop support for the GSEs with two
important changes--eliminate the capital reduction and profit
sweep provisions and mandate payment of an ongoing fee by the
GSEs for the backstop;
FHFA must exercise their existing statutory authority to
draw up both minimum and risk-based capital standards for
Fannie Mae and Freddie Mac;
FHFA must require Fannie Mae and Freddie Mac to draw up
plans to meet both the risk-based and minimum capital
standards. As mandated by HERA the GSE capital plans are then
subject to approval by FHFA
Once each GSE has an approved plan to meet the risk-based
and minimum capital standards FHFA should oversee the
implementation of those plans by the GSEs; and
Once the GSEs have met the capital standards FHFA should
release them from conservatorship.
Permanent FHFA Authority--Vertical Integration
For small lenders, this is the paramount issue within housing
finance reform. As detailed earlier in this testimony, discriminatory
pricing of guaranty fees by Fannie Mae and Freddie Mac in favor of the
large lenders in the pre-crisis era led to both market distortions as
well as a concentration of risk for the GSEs. The statutory prohibition
of such discriminatory pricing, and the authority of the regulator to
oversee and control the GSEs' guaranty fees is an essential cornerstone
of housing finance reform and must be made permanent by Congress.
In addition, the extension of this prohibition to upfront risk
sharing is equally essential, as is the authority for FHFA to regulate
such activities. Our concern is that upfront risk sharing, while
potentially an important technique for the GSEs to control their risk,
also offers the same opportunities for discriminatory action favoring
one group of lenders over another. So, an amendment to current law to
accomplish these dual objectives is important.
Finally, we also believe that an amendment should extend the
prohibition, and grant of FHFA regulatory authority, to any and all
other techniques, transactions or actions by the GSEs that could
provide great marketplace leverage, or lead to vertical integration of
the primary and secondary markets, to any group of lenders at the
expense of all other lenders. Congressional policy should be a strong
endorsement and affirmation of equal pricing and equal treatment for
all lenders that do business with the GSEs.
Permanent Federal Backstop
The national and international capital markets have accepted the
PSPAs as proof of a Federal backstop to Fannie Mae and Freddie Mac,
that has led to favorable pricing for both their debt and the mortgage-
backed securities that they issue. Such favorable pricing has led
directly to benefits for home buyers, who continue to enjoy an adequate
supply of conventional mortgage financing at affordable rates. In
addition, this market acceptance of Fannie Mae and Freddie Mac
mortgage-backed securities is directly linked to the continued
availability of the 30-year fixed-rate mortgage for American home
buyers.
In the interests of keeping legislative action by Congress to
complete housing finance reform as specific and targeted as possible,
while preserving all the benefits to home buyers that flow from the
current system, we believe the best course of action for Congress would
be to make the PSPAs a permanent Federal backstop for the GSEs with a
couple of important changes. The first would be to eliminate the
capital reduction requirements currently built into the PSPAs.
As referenced above, we believe it is a reckless and ill-advised
policy to run two organizations that are so vital to the smooth
functioning of the U.S. mortgage market on a thin and rapidly
diminishing capital level, as required by the current provisions of the
PSPAs. As we have stated publicly, FHFA has the authority, as
conservator, to suspend the dividend payments under the PSPAs, to allow
the GSEs to build a capital buffer. Such a capital buffer is important
to reduce the possibility that either of the GSEs may experience a
quarterly accounting-driven loss due to their hedging activities, which
in turn could require another draw under the PSPA. Such a draw could
lead to market disruption or turmoil, which is entirely avoidable if
the GSEs have a capital buffer, rather than a thin to nonexistent
capitalization as they have now.
We would support administrative action now, or in the immediate
future, by FHFA to address this situation, either through a suspension
of the dividends or other means to allow the GSEs to build a capital
buffer. The smooth functioning of the GSEs is too important to the
housing finance needs of American consumers to allow an entirely
avoidable quarterly fluctuation to disrupt their operations.
Capital Standards
Under existing law (12 U.S.C. 4611 et. seq.) the FHFA Director is
authorized by Congress to establish and enforce both risk-based and
minimum capital standards for Fannie Mae and Freddie Mac. Regrettably
FHFA has failed to exercise this authority while the GSEs have been in
conservatorship.
We believe a vital part of housing finance reform is for FHFA to
immediately begin exercising its statutory authority to set both risk-
based and minimum capital standards that ``ensure that the enterprises
operate in a safe and sound manner, maintaining sufficient capital and
reserves to support the risks that arise in the operations and
management of the enterprises.'' (12 U.S.C. 4611)
The single more important lesson from the '08 financial crisis is
that capital is key. Those institutions that were well capitalized
survived, those that were not, failed, or were bailed out. There will
inevitably be another financial crisis at some point in the future. How
it will come about, and how it will either resemble, or be starkly
different, from the 2008 financial crisis is impossible to know today.
But what we do know is that strong capitalization will be a decisive
factor, as it has been in every financial crisis in the past 100+
years.
Capital Plans
Current law (12 U.S.C. 4622) grants the FHFA Director the authority
to require a GSE that does not meet the minimum or risk-based capital
standards to submit a capital restoration plan. Once FHFA has
established minimum and risk-based capital standards for the GSEs, it
should utilize this authority to require submission of capital
restoration plans by Fannie Mae and Freddie Mac.
These plans are subject to FHFA's approval and must meet the
following standards:
``Each capital restoration plan submitted under this subchapter
shall set forth a feasible plan for restoring the core capital
of the regulated entity subject to the plan to an amount not
less than the minimum capital level for the regulated entity
and for restoring the total capital of the regulated entity to
an amount not less than the risk-based capital level for the
regulated entity. Each capital restoration plan shall
1. specify the level of capital the regulated entity will achieve
and maintain;
2. describe the actions that the regulated entity will take to
become classified as adequately capitalized;
3. establish a schedule for completing the actions set forth in the
plan;
4. specify the types and levels of activities (including existing
and new programs) in which the regulated entity will engage
during the term of the plan; and
5. describe the actions that the regulated entity will take to
comply with any mandatory and discretionary requirements
imposed under this subchapter.''
Release From Conservatorship
Once FHFA approves these plans the GSEs should remain in
conservatorship until they have met the minimum capital standards set
by FHFA. Once they have met the minimum capital standards, and any
other conditions set by FHFA, the GSE should be released from
conservatorship.
What Small Lenders and Their Consumers Do Not Need From Housing Finance
Reform
There are a number of items that small lenders and the consumers
whose housing finance needs they serve, do not need or want from any
housing finance reform effort. Chief among those are the following:
Massive, complex legislation to create someone's vision of
what the U.S. housing finance system should look like if we
were designing it from scratch today;
Creating avenues or loopholes that could be exploited by
the large banks and their Wall Street enablers to reestablish
the un-level, concentrated mortgage market that existed in the
pre-crisis era, with dominant positions for the large banks in
both the primary mortgage origination and secondary capital
markets;
Examples of such avenues or loopholes would include--
Advocacy of incomplete or limited prohibitions on unequal
pricing and risk sharing
Proposals to either break up Fannie Mae and Freddie Mac,
remove the Common Securitization Platform (CPS) from GSE
ownership, or permitting the chartering of additional GSEs
Permitting ownership of such ``new'' GSEs by large
lenders, consortiums of large lenders or Wall Street investment
banks; and
Coupling such ownership with a proposal to establish a
Federal guaranty on the MBS issued by each chartered GSE.
Massive Complex Legislation
As we have stated previously in this testimony--we know the causes
of the GSEs financial failures in 2008 and we know how to remedy those
failures. As we have demonstrated in this testimony, such remedies do
not require broad, sweeping remakes of the entire housing finance
system in this country.
Such proposal for broad, sweeping remakes either from think tanks,
consultants or financial trade associations representing large lender
and/or Wall Street interests primarily exist for two reasons. They
satisfy the ego needs of their author(s) and seek to advance the
financial interests of those who funded the creation of the proposal.
Neither reason is sufficient to justify the scrapping or replacement of
a housing finance system that has provided affordable mortgage finance
for millions of Americans and has worked reasonably well in the post-
crisis era.
We know what went wrong and how to fix it. That is what we should
do.
Avenues or Loopholes
As small lenders, we have noted the consistent theme of the debate
over housing finance reform and the various proposals that have been
put forth to address the issue. Restoration of the primary role of the
large lenders has been the overriding objective of most of the players,
and many of the proposals, that have been put forth.
Initially in the immediate wake of the crisis, with the GSE
conservatorships in their infancy, the debate and proposals did little
to cloak the primary objective of restoration of the large lender
roles.
As the debate has gone on the various players have perceived that
many in Congress, as well as small lender, consumer and other interest
groups are either unsupportive, or actively opposed, to the restoration
of the large lenders in their pre-crisis dominant roles. In recognition
of this development the large lender proponents have shifted their
tactics.
Their proposals now cloak their objective more carefully, but
create avenues or loopholes that are designed to facilitate the efforts
of the large lenders to regain their dominant role. Such avenues
include a number of different items:
Limited prohibitions on unequal pricing--Various proposals
seemingly embrace the current prohibition on unequal pricing and
requirement of equal pricing for all lenders, but do not advocate
extending that pricing to unequal risk sharing terms, or other means to
favor large lenders over small lenders.
Proposals to break up the GSEs or Remove CSP--As currently
constituted the GSEs are coherent, well-functioning entities that are
serving the needs of the marketplace. As outlined previously in this
testimony this current state of affairs can be transitioned to a post-
conservatorship era with modest legislative action and appropriate
regulatory action by FHFA. Breaking up the GSEs and/or removing a vital
component of their ability to create a mortgage-back security to access
the capital markets (the Common Securitization Platform (CSP)), serves
no good purpose except to create opportunities for Wall Street and the
large banks to regain their dominant positions, which they previously
demonstrated they use to favor their financial interests and
disadvantage small lenders and the consumers they serve.
Proposals to charter new GSEs--The U.S. housing finance system
previously had hundreds of GSEs. They were called savings and loans
(S&Ls) and either through direct experience, or by reading our history
books, we all know how well that turned out for our country. In
addition, these proposals to charter new GSEs do not contain an
absolute prohibition on ownership of the newly chartered GSEs by
consortiums of big banks and/or Wall Street investment banks. Thus,
creating an avenue for attainment of the principal objective outlined
above. The ability of small lenders to establish a mutually owned GSE
is not an effective counter to this situation. The capital to establish
a new GSE will be a large sum, well beyond the ability of small
lenders, who constantly work to ensure the adequacy of their own
capitalization, to free up cash to invest.
Proposals to federally guarantee GSE-MBS--On the surface proposals
to establish a Federal guarantee for MBS issued by the GSEs appear
worth considering. With an explicit Federal guarantee investors could
feel secure that principal and interest on their MBS would be paid no
matter what turmoil engulfs the marketplace. However, a closer
examination of the issue reveals several troubling facets:
Securities carrying the full faith and credit guarantee of
the U.S. Government would permit banks, particularly large
banks, to own such securities without holding any capital
against them. The capital free nature of such securities would
give large banks an advantage not enjoyed by other investors,
which in turn could lead to ownership concentrations, that in
turn could grant undue leverage and influence to the large
banks.
If this capital-free securities status for large banks were
coupled with the ability of large bank consortiums to establish
and own a GSE, you could easily see how this would facilitating
the reestablishment of the dominant role for large banks in the
mortgage marketplace and extend that dominant role to the
secondary market as well
Currently the only mortgage security that has a full faith
and credit Federal guaranty is the Ginnie Mae mortgage-backed
security, which is the financing vehicle for FHA-insured, VA-
guaranteed and Rural Housing loans. Each of these loan programs
serves groups for whom the lower interest rates afforded by the
Federal guaranty is critical: first time buyers, low and
moderate income buyers, veterans, and rural borrowers. What
impact will there be on the GNMA program and the borrowers it
serves, if GSE MBS received the same guaranty? We believe this
issue merits further exploration and discussion, at the very
least.
Conclusion
We would ask members of the Senate Banking Committee to note the
contrasts between the testimony you are hearing today, from groups
whose membership consists solely of small lenders, and previous
testimony from groups whose membership includes large lenders.
Hopefully you have noted the consistent message from small lenders,
simply asking Congress for limited action sufficient to address the
well-known reasons why the GSEs entered conservatorship. Further that
Congress should take legislative action that contains specific
provisions to address those issues, without upending the current
mortgage market. We would ask the Committee to remember that the
organizations that have testified before you today do not need to take
into account, or negotiate the views they have expressed to you today
with the large lenders, many of whom were responsible for much of what
led to the 2008 financial crisis. Our views are the distillation of the
observations and beliefs of our members, small lenders all, who have
faithfully served the mortgage finance needs of their communities
through thick and thin and were not responsible for the actions and
conditions that led to the 2008 financial crisis.
Thank you for this opportunity to present out testimony. Please
contact us with any questions and if you desire additional detail.
______
PREPARED STATEMENT OF WILLIAM GIAMBRONE
President and Chief Executive Officer, Platinum Home Mortgage, Rolling
Meadows, Illinois, and President, Community Home Lenders Association
July 20, 2017
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM BRENDA HUGHES
Q.1. On Extending the Safe-Harbor for Qualified Mortgages to
Portfolio Loans--A Qualified Mortgage (QM) is a designation
created by the Dodd-Frank Act and is reserved for loans that
meet certain requirements: i.e. if the lender obtained the
required paperwork from the borrower and the borrower has thus
demonstrated an ``ability to repay.'' Loans that meet the
Qualified Mortgage standard are given a legal safe harbor from
litigation regarding the borrower's true ability to repay.
A key reason for the QM standards was to give those who
bought these mortgages on the secondary market some assurance
that borrower's ability to pay was properly assessed.
But the loans that lenders keep in their own portfolio--
that they don't sell to anyone--don't have this safe-harbor
protection afforded to them.
Do you support expanding the definition of Qualified
Mortgage to include all loans held in portfolio? Please explain
your reasoning.
A.1. Yes. Specifically, as it relates to First Federal, we
approve loans where we feel we have appropriately underwritten
the borrower's ability to repay. This underwriting standard is
not new to First Federal and is applied whether we originate a
loan to be held on our books or sold in the secondary market.
Additionally, if I were to look at a broader application, I
cannot see where there would be a benefit to a financial
institution to put a loan on their books where they do not have
confidence in the borrower's ability to repay Portfolio lending
is among the most traditional and lowest-risk lending in which
a bank can engage. Loans held in a bank's portfolio are well
underwritten because if a loan is to be held in the portfolio,
the bank carries all of the credit and interest rate risk of
that loan until it is repaid. Therefore, it must be
sufficiently conservative to protect the safety and soundness
of the bank. However, existing QM mortgage rules are too
restrictive and have made it difficult, and in some cases
impossible, for creditworthy borrowers--especially low-income
families--to obtain safe and sound loans from portfolio
lenders. I urge you to support legislation that, would treat
any loan made by an insured depository and held in that
lender's portfolio as compliant with the Ability to Repay and
Qualified Mortgage requirements and would provide an important
and much needed correction to the unnecessarily restrictive
standards that now exist.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM JACK E. HOPKINS
Q.1. On 18-Month Exam Cycle--Currently credit unions and
community banks with assets of less than $1 billion in assets
can earn the right to move to an 18-month exam cycle instead of
being examined every 12 months. They earn this only when
regulators give them stellar results on their annual exams.
To those of us who approve of this policy, the appeal of
this incentive is 3-fold:
Lenders that have earned the 18-month exam cycle
want to keep it and are thus incented to stay in
excellent shape.
Lenders that are currently on a 12-month exam cycle
have an additional incentive to improve their
performance.
Regulators can focus on the lenders that do in fact
have significant problems.
What are the tangible benefits, both to customers and to
the lender, when a lender moves to the 18-month exam cycle.
A.1. First, ICBA fully agrees with you that the 18-month exam
cycle for well-rated banks creates positive incentives for
performance that make the banking system safer and allows
regulators to focus on the banks that pose the greatest risk.
We appreciate your support for this policy.
I would add to this that too frequent or intrusive exams
create a significant distraction for community bankers that
prevents them from serving their customers to their full
potential. The examination process is lengthy and its
repetition at too-frequent intervals leaves little time when a
bank is free of examiners and management can give their full
attention to its customers. Ultimately, the customer is
adversely impacted.
Q.2. Should we extend this incentive to more lenders, for
example by raising the asset threshold so that lenders with
$2bn, $5bn, or perhaps $10bn of assets can earn 18-month exam
cycles via stellar exam performance?
A.2. Following on the rationale set forth above regarding the
positive performance incentives created by a longer exam cycle,
ICBA advocates both a higher asset threshold and a longer exam
cycle. ICBA's Plan for Prosperity recommends a 2-year exam
cycle for well-rated banks with up to $5 billion in assets. A
higher asset threshold would reflect recent and ongoing
industry consolidation which has raised the average asset size
of community banks. A longer exam cycle would strengthen
performance incentives, better target exam resources, and allow
bank management to better focus on their communities. A longer
exam cycle for well-rated banks could be safely implemented
because examiners would continue to monitor bank performance
through quarterly call reports.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM CHUCK PURVIS
Q.1. On 18-Month Exam Cycle--Currently credit unions and
community banks with assets of less than $1 billion in assets
can earn the right to move to an 18-month exam cycle instead of
being examined every 12 months. They earn this only when
regulators give them stellar results on their annual exams.
To those of us who approve of this policy, the appeal of
this incentive is 3-fold:
Lenders that have earned the 18-month exam cycle
want to keep it and are thus incented to stay in
excellent shape.
Lenders that are currently on a 12-month exam cycle
have an additional incentive to improve their
performance.
Regulators can focus on the lenders that do in fact
have significant problems.
What are the tangible benefits, both to customers and to
the lender, when a lender moves to the 18-month exam cycle?
A.1. An 18-month exam cycle would lower our exam preparation
and support costs by one-third. We estimate our internal costs
of preparing materials in advance and responding to examiner
inquiries during the 2-3 week exam to be approximately
$200,000. Many internal projects are suspended for 2-4 weeks
during each exam cycle.
These savings would be available to improve rates and lower
fees for our members, or to enhance services used by members.
Q.2. Should we extend this incentive to more lenders, for
example by raising the asset threshold so that lenders with
$2bn, $5bn, or perhaps $10bn of assets can earn 18-month exam
cycles via stellar exam performance?
A.2. Yes. NAFCU believes that all well-run credit unions should
have access to an 18-month exam cycle. As a credit union, we
provide an extensive set of management, financial, operational
and risk reports to our Board every month. These are available
online for our examiner to review each month. NCUA should look
at ways of reducing examiner time in credit unions. This can be
done be reviewing these financials remotely, or collecting more
data remotely during this 18-month period. This could allow
NCUA to follow what is going on at the credit union, while not
adding the burden of more frequent examiner visits.
Additional Material Supplied for the Record
LETTER SUBMITTED BY CAPITAL MARKETS COOPERATIVE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE MORTGAGE COLLABORATIVE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
JOINT LETTER SUBMITTED BY CONSUMER AND HOUSING INDUSTRY GROUPS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
JOINT LETTER SUBMITTED BY SENATOR SCOTT
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
JOINT LETTER SUBMITTED BY SMALL AND MID-SIZED TRADE ASSOCIATIONS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]