Once again, housing finance reform appears to be on Washington’s radar.
With comments by Treasury Secretary Mnuchin, the release of a legislative outline by Senate Banking Committee Chair Sen. Mike Crapo, R-S.D., and the vote to advance Mark Calabria’s nomination to oversee the Federal Housing Finance Agency to the full Senate, the momentum is shifting towards action. Yet, as important as it is to act, it’s even more important to get it right. And for Main Street America, getting it right should mean one thing: Community lenders must be at the core of the future secondary mortgage market.
The facts are straightforward. Consumers want and need responsible, affordable mortgage credit. Historically, it has been community lenders — credit unions and community banks — that have provided access to mortgage credit minus predatory features and without having to first be prompted by their regulators to do so.
The ability to offer mortgage products is highly dependent on the liquidity that the secondary mortgage market provides. So, it is critical that any serious housing finance proposal start with the proposition that the future system should function well for lenders of all shapes and sizes.
That means the future secondary mortgage market must be equitable. Acceptable reform proposals must prevent community lenders from being priced out of the secondary market through giveaways to big banks and huge mortgage finance companies in the form of volume pricing discounts, exceptions from complying with certain terms, and other forms of preferential treatment. All lenders should feel confident that they can access the secondary market on a level playing field with everyone else. Ultimately, both consumers and the market benefit when community lenders can fairly compete for mortgage business.
Pricing parity is a crucial change in the way that Fannie Mae and Freddie Mac do business that only occurred as a result of their conservatorship. It is also a feature of Sen. Crapo’s housing finance reform outline. Going forward, it must be a core component of the modern secondary market.
By itself, however, pricing parity will not achieve equity for community lenders. Proposals for a private multi-guarantor model must go one step further and include an obligation for guarantors to serve all lenders. Absent this obligation, the secondary market of the future may devolve into a system where guarantors simply “cherry pick” and exclusively do business with lenders offering larger volumes of loans. That result would be detrimental to community lenders and borrowers, who are increasingly turning to smaller, community-based financial institutions to meet their mortgage needs. Ensuring community lenders’ equal access to the secondary mortgage market and protecting them from discrimination honors consumer preference.
Finally, in order to ensure equity for community lenders, the modern secondary market must preserve the cash commitment window. Smaller lenders need to be able to deliver a single conforming mortgage and receive funding the next day. The simplicity of the cash commitment window is critical for community lenders who are attempting to meet their consumers’ needs for mortgage credit without operating a full-scale secondary mortgage market operation. Access to a simplified program allows community lenders to lend to consumers and manage the risk on their books without delving into the complexity of the securitization process.
Each of these features — pricing and term parity, an obligation to serve all lenders, and the simplicity of a cash commitment window — are crucial components of any secondary market housing finance reform proposal that honestly seeks to ensure community lenders can compete and offer consumers an alternative to big banks and huge mortgage finance companies. Given the increasing market share that credit unions have gained in the primary mortgage market over the years, it is clear that our member-owners want to be able to count on their community lender when it comes to buying a home.