Small Lenders & GSE Reform

capitol2With the administration and Congress both focusing on reforming Fannie and Freddie – the GSEs – the Senate Banking Committee will hold another hearing on the topic this week, with a focus on maintaining access to the secondary mortgage market for small lenders. This is welcome news. The secondary mortgage market affects millions of American homebuyers and is the lifeblood of small, independent lenders. MBA’s plan for GSE reform ensures equal access for lenders of all sizes and business models, a point I made in my testimony before the same committee last month.

One of MBA’s critical objectives for the secondary mortgage market is to ensure that recent reforms that have leveled the playing field between large and small lenders are preserved and protected. Lenders of all sizes and business models should have equal access on similar terms to government-backed capital market conduits. Over the last five years, small lenders have secured a number of important wins – leveling guarantee fees, preventing special deals for specific lenders, the creation of the single security – in their fight to gain equal access to the secondary mortgage market.

It’s important to remember that most of the gains that have been made for small lenders since the financial crisis have been secured administratively by the Federal Housing Finance Agency (FHFA) and its Director Mel Watt and former Director Ed DeMarco in their role as conservator of the GSEs. There is no guarantee that the next FHFA director will make equal access for small lenders the same priority as Director Watt has, whose term is up in 18 months. Who knows who the next director will be and what his or her goals will be, but they may not be as interested in requiring the GSEs to serve the market in a fair, transparent and nondiscriminatory manner.

This is why congressional reform is necessary. Only Congress can lock in statute the positive changes that have occurred over the past five years. Only Congress can create a new, utility-style regulatory compact that mandates that the GSEs’ successor entities give small lenders equal access, and prevents a return to the days of volume-base discounts and credit waivers. Only Congress can create the explicit guarantee that will make the MBS attractive to investors and keep rate slow for consumers.  Recapitalization of the GSEs, without reform, puts all these gains at risk.

Locking in the reforms that have leveled the playing field for smaller lenders should be part of any comprehensive GSE reform plan. Recapping and releasing the GSEs without meaningful reform runs the risk of a return to sweetheart deals for certain lenders that could hurt small lenders and destabilize the secondary mortgage market once again. We can’t afford to repeat past mistakes.