Despite what almost everyone agrees is the deep importance of the topic, credit unions have become largely ambivalent about reforming the secondary mortgage market and uncertain about potentially disrupting a system which seems to be working well, according to executives with credit union organizations familiar with the issue.
Bob Dorsa, president of the American Consumer Mortgage Association, the only nationwide credit union association directed solely at housing finance issues, replied via email to a question about how much credit unions care about secondary market reform.
“Yes, credit unions care since we are now a bigger participant in the housing finance system,” Dorsa wrote. “ACUMA believes 2012 loan origination totals will exceed $120 billion, which is a large increase over 2011 and a new all-time record. Maintaining a reasonable balance in the capital markets is important to the nation’s housing issues and the economy,” he wrote. But the subject doesn’t have the edge it once did.
In the first 24 months of the housing crisis, when everything was very raw, many credit unions experienced high degrees of anxiety about what might happen with the secondary mortgage market and whether they might have any access to it in the future.
But, as time has passed since the height of the housing finance crisis, credit unions have gradually gained confidence about their abilities to adapt and that has taken a bit of an edge off their anxiety about making that reform happen, Dorsa explained.
“Since 2008 with the housing bubble crash and the first thought that issues for mortgage bankers, including CUs would drastically change, there was much uncertainty. Since then, mortgage lending CUs have taken time to evaluate various business options for the way they will manage the risks associated with mortgage lending and fortunately found there are many that will work nicely. The obvious question is how, or more importantly when will this issue be addressed?”
The current secondary mortgage market is dominated by two government-sponsored enterprises, Fannie Mae and Freddie Mac, which failed in September 2008 and have existed ever since as directly government-controlled organizations. While under federal control, the two organizations have taken steps to tighten the underwriting standards for mortgages they purchase and slowly but steadily their positions have improved. In May of 2012, Fannie Mae reported that it made a profit in the first quarter of that year and that it would not need more government funds, a first since 2008, the results of both its own internal reforms and an improving economy.
Analysts attributed the firms’ recovery to nationwide housing prices drawing near the bottom of their fall and a sharp decrease in the number of houses entering the foreclosure process. In addition, what analysts described as a bulge in serious losses had probably moved through the markets by this time as well, signaling that Fannie and Freddie probably face more profitable positions in the future.
All this has likely helped take the edge off any desire from housing finance originators, financiers or lawmakers to launch a significant fight about reforming Fannie and Freddie.
No one from the Mortgage Bankers Association, a trade association that has both bank and credit union members, would speak on the record for this article. But some MBA executives acknowledged that a big push toward secondary housing market reform did not look likely for this session of Congress or even in the next.
The executives declined to speculate on the reason the issue appears to have moved to the back burner but agreed that neither the Obama administration nor congressional leaders have put the topic on their list of top priorities this year.
“I think part of it is that the system they have now, while not perfect, is working,” said Robert Lund, vice president of residential mortgage lending at the 212,000-member $5.1 billion Bethpage Federal Credit Union headquartered in Bethpage New York.
The self-described largest credit union on Long Island made over 6500 mortgage loans in 2012, worth $1.67 billion, of which almost $1 billion was sold onto the secondary market.
“I don’t think I have anything really profound to add to the conversation,” said Lund, “but I will report that we throw a lot of business toward Fannie and Freddie and have found them good to work with, in some ways better to work with than they used to be,” though he acknowledged that with only five years of history at Bethpage, his memory about the time before the housing crisis was limited.
Lund observed that with the secondary market purchasing loans in a regular and efficient manner and with those loans performing steadily better, allowing for improved markets in securities backed by the mortgages, there has been a steadily increasing belief that things are working and might not need to be fixed right away. “Plus, it’s not like they don’t have a lot of other things to do already,” he observed. He and other housing finance executives said they lacked confidence that lawmakers were up to tackling a topic as complicated and potentially economically harmful as reforming the secondary housing market. “They can’t even agree who is going to be Secretary of Defense,” he snorted, commenting on the recent fight in the U.S. Senate over whether former Sen. Charles Hegel will take that position.
But CUNA General Counsel Eric Richard said that while credit union are growing their housing finance programs with Fannie and Freddie as partners, they also need to remain engaged with the question of when and how to change these market setting organizations.
He pointed out that Texas Republican representative Jeb Hensarling still chairs the House Committee on Financial Services and that he has Fannie and Freddie reform on his agenda. This means credit unions need to remain actively engaged with the issue on Capitol Hill, he said. Further, he contended credit unions should also work to see the reform started, in part to regain some measure of control over the situation and its outcome.
“Absent any legislative work on reform, we see a pattern or creeping changes from the Federal Housing Finance Agency that credit unions should find disturbing,” Richard said. He argued that under acting director Edward DeMarco, the agency appeared to be pricing Fannie and Freddie out of secondary mortgage market, a situation that credit unions should oppose. Richard contended, the FHFA was moving toward a secondary market that will be dominated by large banks with no commitment to providing market access to smaller mortgage issuers such as credit unions.