MARCH 26, 2019.
THE CMLA WRITTEN TESTIMONY CONCERNING THE FUTURE OF THE US SECONDARY.
Chairman Crapo, Ranking Member Brown, and members of the Senate Banking Committee:
The CMLA is pleased to submit this written testimony in conjunction with the Committee’s hearings on March 26th and 27th on the future of the US mortgage secondary market.
At the outset, the Board notes that the written testimony of Wes Hunt from July 2017, found on the Committee website from that hearing date, remains operative and we will not seek to repeat the major points therein. We will highlight some ancillary thoughts regarding this all-important market, one of the most liquid in the world, and one that supports and protects the wealth-building hopes of the vast majority of US citizens.
As Main Street lenders, and ones that do not receive the compelling amount of public subsidies received by the largest US banks, it’s worth noting that business margins remain very tight today for our members. This is due in part to elevated regulatory costs, but also reduced origination volumes and the concurrent reduced margins in correspondent and investor transactions. As has been noted, significant numbers of small lenders have sold out to larger competitors lately.
We raise this to highlight a central viewpoint of our members: GSE reform should hew to the simplest solution that accomplishes the stated public policy goals of making the secondary market more safe than the prior business cycle, while not needlessly diminishing credit-worthy families’ access to credit. We would also add the policy goal of maintaining a thriving Main Street, small lender environment, the loss of which would empower large finance organizations to control more markets, reducing or eliminating consumer choice, and raising prices for these same consumers.
In 2012, the CMLA Board published a white paper advocating that the GSEs transition to carefully-regulated, privately-owned (under federal charter) utilities. This would entail capped ROEs, the payment of monies to remove the implicit guarantee, level pricing for all lenders, very tight regulation on new programs and products, and of course, sufficient capital to weather future downturns. Current law, passed in 2008, already limits executive compensation and gives the regulator much more power over capital standards and prudential regulatory authority. This pathway has relatively small uncertainty and minimal transition costs—which translates directly to lower consumer costs. Most importantly, we know it would work.
Any complex, untested, theoretical secondary market changes will raise costs for small lenders (and thus consumers) precisely because the uncertainty costs will compromise those lenders least able to weather them. As one example, banks offering warehouse lines to small non-depository lenders must continually evaluate the business plans and prospects of these entities, which are our CMLA members. These entities depend on a viable, understandable, time-proven secondary market to show the warehouse banks how the community nonbank lenders will make a profit and be able to repay the credit lines. If a warehouse bank, in part due to disruptive, uncertain changes in the secondary, no longer has confidence in the lenders’ future prospects and ability to compete, those lines can and will be pulled, even for healthy lenders, even in a robust business environment, and more so in a market-downturn environment.
For our community bank members, complex, untested, theoretical secondary market changes will cause them to reconsider offering mortgages at all—hardly the outcome desired by anybody.
Based on numerous conversations around the country and in Washington, we can say with confidence that none of the Think Tank or academic authors of the myriad complex, untested systems can say to our faces that these systems will work without fail. None of the authors can promise us that today’s dependable, extremely liquid market will, once changed to their chalk-board plans, continue to “get the job done.” (Even assuming that the new system works beautifully, any complex changeover will have a lengthy transition period, and this alone will raise uncertainty costs for small lenders and consumers.)
Some might ask: can the GSEs finish their ongoing transition to utilities with no legislation? This is worth exploring. In a perfect world, the Congress would pass a relatively narrow utility bill accomplishing what we outlined above, establishing, for example, the insurance fund that holds GSE premiums backing the private capital to protect taxpayers, and giving the regulator enhanced authority to set ROE targets and level pricing for all lenders.
And if Congress CAN pass this, it ought to.
In the meantime, the conservator/regulator and the Treasury do have the ability to accomplish much of this administratively. An appropriate commitment fee, already part off the PSPAs, can occur to pay for the backing in the PSPAs. Level pricing for all lenders and ROE parameters, as well as other utility principles, can occur in a consent-order type of amendment to the PSPAs. This would shine a light on manageable, measurable, reduced-risk legislation that a future Congress could then consider and enact to consummate the administrative changes done previously. It would heighten odds of a bipartisan legislative finish.
Briefly, we will note that proposals to have the federal government put its stamp directly on mortgage-backed securities means the nation’s TBTF banks would see their balance sheets “turbocharged” because their MBS assets’ capital risk weighting would move from 20% to zero, with the leverage risk weighting moving from 15% to zero. Surely, the nation has already bestowed many benefits unto these behemoths—there is no need to pile on here.
On the topic of multiple guarantors, our Board member Wes Hunt of Homestar Financial of Georgia stated at the July 2017 hearing, in a response to a question on multiple guarantors, that additional guarantors would increase market complexity and raise consumer costs. Other observers have noted that additional guarantors would not increase systemic safety and soundness.
In conclusion, we make these observations and recommendations based on our market experience in every kind of American neighborhood, serving all kinds of American families. Many of our CMLA lenders existed before the Great Recession; we survived this great storm because we balanced the needs for families to invest and grow while keeping a close, close eye on our underwriting—such that our mortgages worked for Main Street families, and worked for all of America.
What we are proposing today will work for all of America too.
Thank you for this opportunity to participate.
The CMLA Board of Directors.
Dr. Ed Wallace, Executive Director.