Community Bankers of Iowa Monthly Banker Update November 2013 | Page 8

Washington Watch

Written By: Ron Haynie, Senior Vice President of Mortgage
Finance Policy for ICBA

Principled GSE Reform
While
Washington and
much of
the rest of
the nation
has been
preoccupied with
questions over the federal budget and debt ceiling, policymakers
have nevertheless continued to move ahead on fundamental
reforms to the housing finance system. With the House and
Senate separately advancing vastly different proposals, ICBA
released a comprehensive white paper that leaves no question
about where the community banking industry stands on the issue.
“Housing Finance Reform: A Community Banking Perspective” details the community banking industry’s role in the
housing finance system, principles for reforming the secondary
mortgage market and viewpoints on proposed reforms. Here’s a
quick rundown.
Industry essentials
First of all, the white paper offers some basic background
information on community bank mortgage lending. Not only do
community banks account for up to 20 percent of the market,
they also provide a disproportionately large number of loans to
low- and moderate-income borrowers and strengthen the mortgage and housing markets with their conservative underwriting
practices. They are also more likely to hold mortgage loans in
portfolio to serve the unique needs of their customers, particularly property owners in small and rural communities.
Nevertheless, even portfolio lenders need robust secondary
market access to meet customer demand for 30-year fixed-rate
loans. In a recent ICBA survey, nearly 30 percent of community
bank respondents said they sell half or more of the mortgages
they originate into the secondary market.
This liquid market allows community banks to effectively hedge
interest rate risk, offer rate locks to their customers with relative
ease, retain servicing rights, enjoy a virtually paperless loandelivery process and generally receive funding from the government-sponsored enterprises in cash within 48 hours. And the
process works as intended by freeing up capital for additional
loans.
Rules for reform
With housing and household operations making up 20 percent
of the U.S. economy, ICBA’s white paper warns against reforms
that would disrupt the housing finance system, limit community
bank access to the secondary market, or give control of the
market to Wall Street institutions.
Further, it provides key features of a successful secondary mortgage market, which must:

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CBI Banker Update

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November 2013

• provide equal and direct access for community banks on a
single-loan basis that does not require community banks to
securitize their own loans;
• preserve the relatively simple process of selling loans for
community banks and other small lenders;
• be well capitalized, liquid and reliable enough to effectively
serve the entire mortgage industry in all markets, at all
times, even in challenging economic circumstances;
• ensure robust oversight by a strong and competent regulator;
• not appropriate customer data for cross-selling of financial
products;
• provide originators the option to retain servicing and ensure
servicing fees are reasonable;
• have a limited focus on supporting residential and multifamily housing; and
• maintain an explicit government guarantee against catastrophic loss.
Deal-breakers
With this positive reinforcement in place, “Housing Finance Reform: A Community Banking Perspective” also spotlights some
existing proposals that are unworkable for the industry. For
instance, the Federal Home Loan Banks should not be the sole
aggregator for community banks, which would limit the industry’s
secondary market options and potentially jeopardize the FHLBanks’ primary function of providing advances.
Further, ICBA’s white paper challenges the idea that covered
bonds are an adequate alternative to the secondary market
because they are capital intensive, which makes them infeasible for all but the largest banks. Requiring smaller lenders to
sell their loans to larger banks would only fuel further industry
concentration and consolidation. The same goes for complex
credit enhancements that require the management of multiple
counterparties, which would create risks too great for small lenders to bear.
Easy does it
Generally, in creating a new housing finance system, policymakers must not destroy liquidity for all but the few largest players,
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