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From Banking and Finance Law Daily, October 1, 2013

ICBA paper discusses impact of housing finance reform on community banks

By John M. Pachkowski, J.D.

The Independent Community Bankers of America® (ICBA) has released a white paper that provides the community banking industry’s priorities as Congress debates how to reform the housing finance system. The paper noted that community banks represent 17 to 20 percent of the national mortgage market, and rely on a business model focused on relationship lending.

House and Senate measures. Currently, there are two pieces of legislation in Congress that would reform the housing finance system.

In the House of Representatives, the Financial Services Committee passed, along party lines, H.R. 2767, the Protecting American Taxpayers and Homeowners (PATH) Act, which would create a sustainable housing finance system by ending the federal government’s domination of the housing finance market and giving consumers more choices in determining which mortgage product best suits their needs. The PATH Act would also exempt issuers of asset-backed securities from the proposed definition of “covered funds,” which is the list of private investment funds and vehicles in which banks are restricted from investing, and direct the Secretary of the Treasury, in consultation with other relevant federal financial regulators, to establish a covered-bond regulatory oversight program. Finally, the PATH Act would wind down the operations of the two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—which have been under the conservatorship of the Federal Housing Finance Agency.

Recently, Rep. Maxine Waters (D-Calif), the Ranking Member of the Financial Services Committee, announced that she will be unveiling housing finance securitization reform legislation as an alternative to the PATH Act that aligns with a set of principles House Democrats released in July 2013.

Bipartisan legislation was introduced by Senators Mark Warner (D-Va) and Bob Corker (R-Tenn) in late June 2013. S. 1217, Housing Finance Reform and Taxpayer Protection Act of 2013, would require that private market participants hold 10 percent of the first loss of any mortgage-backed security that purchases a government reinsurance wrap. The legislation would also enhance market liquidity by putting in place an infrastructure for splitting credit investors, who want to take on this risk of loss, from rate investors, who have traditionally supplied the markets with the funds necessary to borrow at low rates. As with the PATH Act, Fannie Mae and Freddie Mac would be wound down within five years of enactment of the legislation, with appropriate utility duties and functions transferred to a different, modernized, streamlined agency.

Accelerate consolidation. The ICBA’s paper sets forth principles “for a strong and broadly accessible housing finance system that serves the needs of all creditworthy borrowers and the broader economy” and cautions that “[d]ecisions made today will greatly influence the shape of any final law and the key features of the future secondary mortgage market.” The paper raises concerns that a secondary market that is structurally more complex will effectively limit access of community banks and their customers to that secondary market and “accelerate the trend toward industry consolidation, giving effective control of the mortgage market to the same megabanks and Wall Street firms that precipitated the last [financial] crisis.”

Key reform principles. In order for community banks to participate in a reformed secondary market, that market must:

  1. be impartial and provide equitable and direct access for community banks on a single‐loan basis that does not require the community bank to securitize its own loans;
  2. preserve the current GSE model, whereby “selling loans is relatively simple” since community banks and other small lenders that individually do not have the scale or resources to obtain and manage complex credit enhancements from multiple parties;
  3. be well capitalized, liquid, and reliable, with care taken to ensure liquidity as the system transitions to a new mortgage-backed securities market;
  4. have strong oversight from a single regulator to ensure that GSEs or any future entity are adequately capitalized commensurate with their risks and compliant with their primary mission;
  5. not allow secondary market entities to use or sell customer data since community banks grow by deepening and extending their relationships with their current customer base;
  6. allow originators the option to retain servicing and servicing fees since this is a crucial aspect of the relationship‐lending business model, giving community banks the opportunity to meet the additional banking needs of their customers;
  7. not allow secondary market entities to compete with originators at the retail level, where they would enjoy an unfair advantage; and
  8. provide an explicit government guarantee.

Commenting on the paper’s release, ICBA Senior Vice President of Mortgage Finance Policy Ron Haynie said, “ICBA and our nation’s community banks want to ensure these common-sense lenders can continue to serve the mortgage-finance needs of customers and communities nationwide for years to come.”

Companies: Fannie Mae; Freddie Mac; Independent Community Bankers of America

IndustryNews: BankingOperations GovernmentSponsoredEnterprises Loans Mortgages

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