Opinion: GSE policy changes are positive for small lenders
We have recently seen a major shift in the focus of Fannie Mae, Freddie Mac and their regulator, FHFA. Just a few years ago, we were talking about shrinking the GSEs’ footprint, giving GSE charters to vertically integrated Wall Street banks, and giving these same Wall Street banks access to the GSEs’ Common Securitization Platform, which would have enabled them to dominate mortgage markets.
The focus has now shifted to equitable housing for underserved and minority borrowers, initiatives to improve access to affordable mortgage credit, and equitable lender access to GSE loans. The Community Home Lenders Association (CHLA), which represents small and mid-size independent mortgage bankers (IMBs), applauds these developments, and we just submitted comment letters on equitable housing and housing goals on how to build on this.
First, in January, a long-time FHFA policy of guarantee fee parity (no volume discounts for large lenders) was formalized and made permanent under amendments to the Treasury PSPAs. CHLA is calling on FHFA to take the additional step of barring volume discounts for large lenders in mortgage insurance (MI) coverage of high-LTV GSE loans. FHFA also should also make permanent the longstanding GSE pilots for direct MI coverage. These changes are important so that all borrowers have equitable access to Fannie/Freddie loans.
Unfortunately, the January PSPA amendments also took a huge step backward — by imposing restrictions on higher-risk loans that are critical to homeownership for minority and underserved borrowers, restrictions on investor loans that are commonly used for affordable rental housing and restrictions on lender access to the GSE cash window.
CHLA strongly commends the decisive actions that FHFA Acting Director Sandra Thompson has taken since she took over in June. The most significant was suspending all these PSPA restrictions in concert with Treasury, a top CHLA priority since shortly after they took effect. In both our recent comment letters, CHLA is calling on FHFA to make these suspensions permanent.
Acting Director Thompson has also made a number of other important access to credit changes – including ending the adverse market fee, making permanent the option to use desktop appraisals, limiting use of the Common Securitization Platform (CSP) to Fannie and Freddie, increasing the GSE housing goals, and reopening the GSE capital rule.
Capital requirements for Fannie and Freddie should be reduced. It is widely agreed they are in excess of the risks of the loans the GSEs guarantee. Excessive capital levels translate into excessive g-fees and loan level price adjustments (LLPAs). Moreover, failure to appropriately reflect credit risk transfers in the current capital rule discourages an important activity that substantially reduces GSE risk and encourages market discipline.
Excessive LLPAs should also be addressed, since they can stand in the way of equitable housing and access to credit. Broader market considerations also come into play. FHA is overcharging for its loans – both in the annual premiums it charges and its policy since 2013 of charging premiums for the Life of the Loan. But policymakers don’t want FHA’s market share to be too large. So, Fannie and Freddie need to trim excessive g-fee and LLPA levels – to make it easier to coordinate with FHA premium reductions.
In our recent comment letters, CHLA also reiterated our longstanding call for more transparency in the GSEs’ automated underwriting systems (AUS). The current black box allows stealth contractions in their credit boxes, as we believe took place earlier this year.
Of course, Fannie and Freddie need sound underwriting requirements. But they should never be used as a policy instrument to arbitrarily shrink the role of Fannie and Freddie, who are vital to access to credit and to equitable housing. More transparency makes this easier to identify.
Finally, what about the long-term future of Fannie Mae and Freddie Mac? Thirteen years after entering conservatorship, it is unclear if and when they will ever exit. But January’s PSPA loan and cash window restrictions show the risks of major decisions that are not subject to rigorous public debate and transparency. Such debate should be a priority for Congress and federal policy makers.
Another debate is how to regulate the GSEs. The term “utility model” is casually tossed about – but it means different things to different people. CHLA, and other groups like the National Association of Realtors have laid out detailed plans on how a true utility model should work. There needs to be a balance of maintaining the GSEs’ affordable housing mission while allowing Fannie and Freddie to earn profits, but preventing them from taking excessive risks to maximize earnings like they did prior to 2008.
Finally, Congress should never authorize additional GSE charters. Handing over the GSE guarantee and platform to vertically integrated Wall Street banks under the Trojan Horse of “competition” stands that term on its head. Ultimately, it is underserved and minority borrowers that would suffer, given the strong statistical evidence that banks significantly lag in mortgage access to credit.
Today the trends for GSE equitable housing for borrowers and small lenders are good. Let’s keep up the momentum.
Craig Thomas is the Policy Director of the Community Home Lenders Association (CHLA).
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