Amid efforts to overhaul Fannie Mae and Freddie Mac as they deplete their capital buffer, small lenders are warning against actions they say could be disastrous for community-based mortgage lending.
Representatives from small banks and credit unions on Thursday urged the Senate Banking Committee to avoid mirroring previous congressional proposals regarding government-sponsored enterprises and instead called for changes to level the playing field for all mortgage lenders.
“Reform need not be radical or extreme, but should be targeted and surgical,” said Brenda Hughes, senior vice president and director of mortgage and retail lending at First Federal Savings in Twin Falls, Idaho, on behalf of the American Bankers Association.
Hughes said changes should include a ban on volume-based discounts offered to larger lenders, and she argued for the preservation of the “cash window” that allows originators to sell loans on an individual basis to the GSEs.
Community Home Lenders Association President William Giambrone told the panel that Congress should prohibit vertical integration, even in small percentages, that allows larger lenders to be involved in primary and secondary markets.
The six witnesses agreed that no more than two entities should be chartered to compete with the GSEs, in order to minimize complexities and avoid driving up their legal and internal costs. The small lenders said that without a set method of recapitalization through Federal Housing Finance Agency or the U.S. Treasury, the current state of affairs in the housing finance market could trigger another crisis.
In May, Federal Housing Finance Agency Director Mel Watt delivered sobering testimony that Fannie Mae and Freddie Mac will deplete their capital buffer by 2018 and could require drawing additional taxpayer funds — dire circumstances noted by Senate Banking Committee Chairman Mike Crapo (R-Idaho) in his opening remarks at Thursday’s hearing.
“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,” Crapo said. “Reform is urgently needed.”
Wide and bipartisan support should make recapitalizing Fannie Mae and Freddie Mac a top priority while other housing finance reform proposals are hashed out, according to Pete Sepp, president of center-right National Taxpayers Union.
“In the very, very near term we have to focus on capitalizing these GSEs so that we are spared the immediate and more horrifying prospect of more tax dollars spent shoring up their positions,” he said in an interview after Thursday’s hearing.
Sepp said immediate preventive action should not stop Congress from diving into a more expansive overhaul at a later date. NTU would likely support a more comprehensive approach, he said, with elements similar to Republican-backed legislation from 2013 known as the PATH Act.
“It’s always so tempting for Congress to make some tweaks at the edges and call it a day when some very long-term thinking is often in order,” he said.