SBC on Small -Lender Access to the Secondary Mortgage Market
AT NOVEMBER 5TH’S SENATE
BANKING COMMITTEE HEARING, Members discussed the role of smaller lenders in the
housing market and their concerns with impending housing finance reform
legislation with a diverse group of witnesses representing the small-lender
community.
In opening remarks,
Chairman Tim Johnson said facilitating small-lender access to secondary
mortgage market is a top priority for the Committee as they draft housing
finance reform legislation. He added that it is crucial for the Committee’s
legislation to “get small-lender access right” and praised Sens. Jon Tester
(D-Mont.), Mike Johanns (R-Neb.), and Heidi Heitkamp (D-N.D.) for focusing on
this issue and “making progress” on a solution.
Ranking Member Mike
Crapo (R-Idaho) echoed Johnson’s sentiments, but highlighted the regulatory
burden on smaller lenders, specifically noting the costs and impact on credit
availability. He also discussed the two provisions in the Housing Finance
Reform and Taxpayer Protection Act (S.1217) that provide affordable secondary
market access for small lenders through two access points, a “mutual
organization” and by allowing the Federal Home Loan Banks (FHLB) to securitize
loans originated by their members.
However, Crapo said
the Committee is still deciding how to structure the mutual from an operational
side, how to best fund it, what criteria for membership are appropriate so that
the mutual is adequately capitalized, and what safeguards are appropriate to
ensure effective risk management.
In his opening
statement, Richard Swanson, testifying on behalf of the Council of Federal
Home Loan Banks, described the role that small lenders play in the housing
market and how the FHLBs facilitate their lending capabilities. With regard to
S.1217, he said two “fundamental challenges” must be addressed if small lenders
are to be able to compete: 1) accessing the secondary market for small loan
volume lenders; and 2) obtaining fair pricing for the value of the mortgages
originated by smaller lenders.
Swanson praised S.
1217 for including several provisions that will enable smaller lender to
successfully provide mortgages in the future, and noted that the FHLBs are
will, and have the ability, to deliver on the expanded role in the secondary
market that the draft legislation envisions. In closing, he urged Sens. Bob
Corker (R-Tenn.) and Mark Warner (D-Va.) to rethink the proposed regulatory
oversight of the FHLBs in S. 1217, advocating to either stay under the
supervisory guidance of the Federal Housing Finance Agency (FHFA) or a
“stand-alone,” independent regulator governed by a board structure.”
In his testimony,
William Loving, Chairman of the Independent Community Bankers of America
(ICBA), highlighted the secondary mortgage market’s “critical” role in allowing
community lenders to support mortgage lending demand, hedge interest rate risk
and maintain their capital levels under the new Basel III capital regime.
Loving said ICBA
supports S.1217, specifically noting their support for the legislation’s Mutual
Securitization Corporation (MSC), the expanded role of the FHLBs, and the 15
percent limit on outstanding guaranteed securities. In order to ensure a smooth
transition and maintain the role of smaller lenders in the secondary market, he
said the MSC should be capitalized by the profits of the current government
sponsored entities (GSE), all GSE loan aggregation and automation
infrastructure should be transferred to the MSC, all current approved GSE
sellers and servicers in good standing with assets up to $500 billion be eligible
to sell and service mortgages through the MSC, and it should be regulated by
the Federal Deposit Insurance Corporation (FDIC). In closing however, Loving
expressed concern with the “excessive complexity” that S. 1217 may introduce.
In their opening statements,
Bill
Hampel, Senior Vice President and Chief Economist of the Credit Union
National Association (CUNA), and John
Harwell, testifying on behalf of the National Association of Federal Credit
Unions (NAFCU), said the housing finance system is “unquestionably” in need of
reform and Harwell outlined the following credit union priorities in any
housing finance reform legislation: maintaining
unfettered guaranteed access to the secondary mortgage market, an explicit
government guarantee on mortgage-backed securities, fair pricing and fee
structures that reward credit union loan quality, ensuring market feasibility
of a mutual, should such an entity be adopted, flexible underwriting standards
that will allow credit unions to best serve their members, and adequate
transition time to a new housing finance model.
Both
CUNA and NAFCU expressed
support for the “well thought out” reforms embodied in S. 1217, but despite
their overall support of the draft legislation, Hampel and Harwell noted
several suggested improvements to the law that “will be necessary” for it to
work for small lenders: 1) the MSC’s membership cap should be significantly
increased, it should have access to the common securitization platform being
developed by the FHFA, it should be permitted to issue both covered and private
label securities (PLS) and it must be well capitalized – primarily through
per-transaction fees; 2) A bond guarantor approach should be the preferred
first-loss coverage for the government guarantee envisioned in the draft
legislation; 3) The first 10 percent of loss
should be on each security, or a limited vintage of securities, and not
to the entire book of business of the guarantor; 4) Underwriting
standards should be controlled by the FMIC; 5) The secondary market needs
strong regulatory oversight to ensure equal access for small institutions and
an orderly functioning of the system; 6) Private market participants should be
able to revise servicing standards subject to oversight by the FMIC; 7)
Maintaining access to the GSE cash window through the mutual or another
structure; 8) Allowing for flexible underwriting standards and 9) The
transition from the current system to any new housing finance system must be
reasonable and orderly.
In closing, Hampel
and Harwell urged the Committee to address statutory limitations that are
restricting the ability of credit unions to fully service their customers,
including the need for additional investment authority, an increase in the
business lending cap under the Federal Credit Union Act, and relief from the
compliance obligations of mortgage regulations promulgated by the Consumer
Financial Protection Bureau.
In his testimony,
Bill Cosgrove, Chairman-Elect of the Mortgage Bankers Association (MBA), said
making the secondary market work for smaller lenders is critical for providing
a competitive market. He said it is important to
recognize that not all small lenders have the same needs when it comes to
accessing the capital markets for mortgages.
“Lenders
with the skills and the capital should be in a position to make their own
choice about how, when, where, and to whom to sell their production, based on
their core competencies and other strategic objectives,” Cosgrove said.
As policymakers
consider both transitional and end state reforms, he said the future secondary
market needs to provide direct access, on competitive terms, for those lenders
who can take on the requisite responsibilities. In particular, Cosgrove said
smaller lenders need a secondary market that delivers: 1) Price certainty,
including guarantee fees that reflect the risk of the underlying loan – not the
loan volume or the asset size of the lender; 2) Execution for both
servicing-retained and servicing-released loans; 3) Single loan and/or small
pool executions with a low minimum pool size; 4) Ease of delivery; and 5) Quick
funding. In regard to S. 1217, Cosgrove also expressed concern about the
complexity that could be introduced by the draft legislation, the need to
address state-level laws that could restrict access to the secondary market and
the importance of preserving “key GSE assets.”
In
his opening
statement, Jeff Plagge, Chairman of the American Bankers Association (ABA),
commended Corker and Warner for preserving the government guarantee in S. 1217,
noting its importance to the secondary market and smaller lenders in
particular. He also expressed his support for the
mutual, as long as it is “structured in an economically viable way,” with
appropriate governance and equitable access for all members, regardless of
size. In closing, he urged the Committee to implement a timeline is orderly and
spread over a “number of years” to prevent market destabilization and other
negative consequences.
Questions
and Answer
Johnson
asked the panel about the importance of preserving the cash window, flexible
underwriting standards and creating a well-structured mutual organization. All
of the panelists agreed that it is “extremely” important that the reform
legislation get these “key” infrastructure provisions right. They also all
expressed support for reform, but urged the Committee to keep certain aspects
of the system that work well and implement a transition structure that allows
an overlap between the old system and the new.
Crapo
requested that each panelist work with each other, and the Committee, to “come up with a sensible, mutually-agreeable solution
for how to best structure the small lender’s access to the secondary market.”
He then proceeded to ask Loving and Plagge how the mutual organization should
be structured in order to entice community bank participation. They both said
it will be important that community banks have meaningful input through a
community banking council-like division and are represented on the governance
board. Plagge added that he would like to see a more inclusive mutual
organization that is open to members of all sizes, and all the panelists said
they do not think the mutual’s membership criteria should be capped at a
certain threshold.
Corker
noted that all of the panelists expressed support for the basic tenets of the
mutual organization, common securitization platform, per loan basis G-fees, and
ample transition time. In response to a question from Corker on underwriting
standards, Hampel said assessing the viability of an individual loan
application depends on so many different factors that it is very difficult to
write a standard that gives underwriters the appropriate flexibility. He added
that it is understandable that the rules being written today are a little
stricter because U.S. markets are still recovering from the crisis, but he
expressed concern that current and proposed underwriting standards will exclude
people on the lower end of the income scale.
Sen.
Joe Manchin (D-W. Va.) asked the panel if the 10 percent capital ratio required
by S. 1217 is adequate or overkill. Cosgrove said MBA believes the ratio is too
high, noting that MBA estimates that a “four or five percent capital ratio
would have been sufficient to get us through the crisis,” and a 10 percent
ratio will restrict credit availability. Loving said 10 percent on any mortgage or any security is “not too much,” but
requiring the bond guarantors to put up that much capital is too onerous.
For
testimony and a webcast of the hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2013
AT NOVEMBER 5TH’S SENATE
BANKING COMMITTEE HEARING, Members discussed the role of smaller lenders in the
housing market and their concerns with impending housing finance reform
legislation with a diverse group of witnesses representing the small-lender
community.
In opening remarks,
Chairman Tim Johnson said facilitating small-lender access to secondary
mortgage market is a top priority for the Committee as they draft housing
finance reform legislation. He added that it is crucial for the Committee’s
legislation to “get small-lender access right” and praised Sens. Jon Tester
(D-Mont.), Mike Johanns (R-Neb.), and Heidi Heitkamp (D-N.D.) for focusing on
this issue and “making progress” on a solution.
Ranking Member Mike
Crapo (R-Idaho) echoed Johnson’s sentiments, but highlighted the regulatory
burden on smaller lenders, specifically noting the costs and impact on credit
availability. He also discussed the two provisions in the Housing Finance
Reform and Taxpayer Protection Act (S.1217) that provide affordable secondary
market access for small lenders through two access points, a “mutual
organization” and by allowing the Federal Home Loan Banks (FHLB) to securitize
loans originated by their members.
However, Crapo said
the Committee is still deciding how to structure the mutual from an operational
side, how to best fund it, what criteria for membership are appropriate so that
the mutual is adequately capitalized, and what safeguards are appropriate to
ensure effective risk management.
In his opening
statement, Richard Swanson, testifying on behalf of the Council of Federal
Home Loan Banks, described the role that small lenders play in the housing
market and how the FHLBs facilitate their lending capabilities. With regard to
S.1217, he said two “fundamental challenges” must be addressed if small lenders
are to be able to compete: 1) accessing the secondary market for small loan
volume lenders; and 2) obtaining fair pricing for the value of the mortgages
originated by smaller lenders.
Swanson praised S.
1217 for including several provisions that will enable smaller lender to
successfully provide mortgages in the future, and noted that the FHLBs are
will, and have the ability, to deliver on the expanded role in the secondary
market that the draft legislation envisions. In closing, he urged Sens. Bob
Corker (R-Tenn.) and Mark Warner (D-Va.) to rethink the proposed regulatory
oversight of the FHLBs in S. 1217, advocating to either stay under the
supervisory guidance of the Federal Housing Finance Agency (FHFA) or a
“stand-alone,” independent regulator governed by a board structure.”
In his testimony,
William Loving, Chairman of the Independent Community Bankers of America
(ICBA), highlighted the secondary mortgage market’s “critical” role in allowing
community lenders to support mortgage lending demand, hedge interest rate risk
and maintain their capital levels under the new Basel III capital regime.
Loving said ICBA
supports S.1217, specifically noting their support for the legislation’s Mutual
Securitization Corporation (MSC), the expanded role of the FHLBs, and the 15
percent limit on outstanding guaranteed securities. In order to ensure a smooth
transition and maintain the role of smaller lenders in the secondary market, he
said the MSC should be capitalized by the profits of the current government
sponsored entities (GSE), all GSE loan aggregation and automation
infrastructure should be transferred to the MSC, all current approved GSE
sellers and servicers in good standing with assets up to $500 billion be eligible
to sell and service mortgages through the MSC, and it should be regulated by
the Federal Deposit Insurance Corporation (FDIC). In closing however, Loving
expressed concern with the “excessive complexity” that S. 1217 may introduce.
In their opening statements,
Bill
Hampel, Senior Vice President and Chief Economist of the Credit Union
National Association (CUNA), and John
Harwell, testifying on behalf of the National Association of Federal Credit
Unions (NAFCU), said the housing finance system is “unquestionably” in need of
reform and Harwell outlined the following credit union priorities in any
housing finance reform legislation: maintaining
unfettered guaranteed access to the secondary mortgage market, an explicit
government guarantee on mortgage-backed securities, fair pricing and fee
structures that reward credit union loan quality, ensuring market feasibility
of a mutual, should such an entity be adopted, flexible underwriting standards
that will allow credit unions to best serve their members, and adequate
transition time to a new housing finance model.
Both
CUNA and NAFCU expressed
support for the “well thought out” reforms embodied in S. 1217, but despite
their overall support of the draft legislation, Hampel and Harwell noted
several suggested improvements to the law that “will be necessary” for it to
work for small lenders: 1) the MSC’s membership cap should be significantly
increased, it should have access to the common securitization platform being
developed by the FHFA, it should be permitted to issue both covered and private
label securities (PLS) and it must be well capitalized – primarily through
per-transaction fees; 2) A bond guarantor approach should be the preferred
first-loss coverage for the government guarantee envisioned in the draft
legislation; 3) The first 10 percent of loss
should be on each security, or a limited vintage of securities, and not
to the entire book of business of the guarantor; 4) Underwriting
standards should be controlled by the FMIC; 5) The secondary market needs
strong regulatory oversight to ensure equal access for small institutions and
an orderly functioning of the system; 6) Private market participants should be
able to revise servicing standards subject to oversight by the FMIC; 7)
Maintaining access to the GSE cash window through the mutual or another
structure; 8) Allowing for flexible underwriting standards and 9) The
transition from the current system to any new housing finance system must be
reasonable and orderly.
In closing, Hampel
and Harwell urged the Committee to address statutory limitations that are
restricting the ability of credit unions to fully service their customers,
including the need for additional investment authority, an increase in the
business lending cap under the Federal Credit Union Act, and relief from the
compliance obligations of mortgage regulations promulgated by the Consumer
Financial Protection Bureau.
In his testimony,
Bill Cosgrove, Chairman-Elect of the Mortgage Bankers Association (MBA), said
making the secondary market work for smaller lenders is critical for providing
a competitive market. He said it is important to
recognize that not all small lenders have the same needs when it comes to
accessing the capital markets for mortgages.
“Lenders
with the skills and the capital should be in a position to make their own
choice about how, when, where, and to whom to sell their production, based on
their core competencies and other strategic objectives,” Cosgrove said.
As policymakers
consider both transitional and end state reforms, he said the future secondary
market needs to provide direct access, on competitive terms, for those lenders
who can take on the requisite responsibilities. In particular, Cosgrove said
smaller lenders need a secondary market that delivers: 1) Price certainty,
including guarantee fees that reflect the risk of the underlying loan – not the
loan volume or the asset size of the lender; 2) Execution for both
servicing-retained and servicing-released loans; 3) Single loan and/or small
pool executions with a low minimum pool size; 4) Ease of delivery; and 5) Quick
funding. In regard to S. 1217, Cosgrove also expressed concern about the
complexity that could be introduced by the draft legislation, the need to
address state-level laws that could restrict access to the secondary market and
the importance of preserving “key GSE assets.”
In
his opening
statement, Jeff Plagge, Chairman of the American Bankers Association (ABA),
commended Corker and Warner for preserving the government guarantee in S. 1217,
noting its importance to the secondary market and smaller lenders in
particular. He also expressed his support for the
mutual, as long as it is “structured in an economically viable way,” with
appropriate governance and equitable access for all members, regardless of
size. In closing, he urged the Committee to implement a timeline is orderly and
spread over a “number of years” to prevent market destabilization and other
negative consequences.
Questions
and Answer
Johnson
asked the panel about the importance of preserving the cash window, flexible
underwriting standards and creating a well-structured mutual organization. All
of the panelists agreed that it is “extremely” important that the reform
legislation get these “key” infrastructure provisions right. They also all
expressed support for reform, but urged the Committee to keep certain aspects
of the system that work well and implement a transition structure that allows
an overlap between the old system and the new.
Crapo
requested that each panelist work with each other, and the Committee, to “come up with a sensible, mutually-agreeable solution
for how to best structure the small lender’s access to the secondary market.”
He then proceeded to ask Loving and Plagge how the mutual organization should
be structured in order to entice community bank participation. They both said
it will be important that community banks have meaningful input through a
community banking council-like division and are represented on the governance
board. Plagge added that he would like to see a more inclusive mutual
organization that is open to members of all sizes, and all the panelists said
they do not think the mutual’s membership criteria should be capped at a
certain threshold.
Corker
noted that all of the panelists expressed support for the basic tenets of the
mutual organization, common securitization platform, per loan basis G-fees, and
ample transition time. In response to a question from Corker on underwriting
standards, Hampel said assessing the viability of an individual loan
application depends on so many different factors that it is very difficult to
write a standard that gives underwriters the appropriate flexibility. He added
that it is understandable that the rules being written today are a little
stricter because U.S. markets are still recovering from the crisis, but he
expressed concern that current and proposed underwriting standards will exclude
people on the lower end of the income scale.
Sen.
Joe Manchin (D-W. Va.) asked the panel if the 10 percent capital ratio required
by S. 1217 is adequate or overkill. Cosgrove said MBA believes the ratio is too
high, noting that MBA estimates that a “four or five percent capital ratio
would have been sufficient to get us through the crisis,” and a 10 percent
ratio will restrict credit availability. Loving said 10 percent on any mortgage or any security is “not too much,” but
requiring the bond guarantors to put up that much capital is too onerous.
For
testimony and a webcast of the hearing, please click here.