A housing finance reform bill unveiled by House Republicans July 11 would wind down Fannie Mae and Freddie Mac and also contains a number of regulatory relief provisions, including tweaks to the CFPB’s qualified mortgage rule and exam reform.
The Protecting American Taxpayers and Homeowners Act, which has not yet been introduced but is championed by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), would replace Fannie Mae and Freddie Mac with a nongovernmental, not-for-profit entity. Both Fannie Mae and Freddie Mac would be eliminated within five years by shrinking their securities portfolio by 15% per year.
The National Mortgage Market Utility proposed by the bill would be regulated by the Federal Housing Finance Administration, but unlike the GSEs, it would not guarantee mortgages. Instead, it would take over the current GSE origination platform and convert it into an “open access common securitization platform.”
According to a summary of the bill released by the committee, both qualified mortgages and nonqualified mortgages could be securitized through the utility. The bill also addresses a concern of credit unions: fees based on the size, business line, composition or loan volume of the issuer would be forbidden.
CUNA President/CEO Bill Cheney addressed that provision in a July 17 letter to Hensarling, saying credit unions “should be able to sell one loan at a time and not be discriminated against in the marketplace merely because the volume of loans an individual institution can annually sell may be smaller.”
Cheney also noted the provisions that would allow the utility to securitize both QM and non-QM would also help ensure continued credit union access to the secondary market.
However, Cheney expressed concern about a provision that would authorize any Federal Home Loan Bank to aggregate mortgages for securitization through the platform. Although the CUNA leader said he supports using the FHLBs as aggregators, some credit unions find it difficult to becoming home loan bank members. Privately insured credit unions are prevented from doing so by law.
“As this legislation moves though the House we would appreciate that more thought be given as to how credit unions can more easily gain membership to the FHLB system, including the addition of language permitting privately insured credit unions to join a FHLB,” Cheney said.
Cheney also addressed an issue that both credit unions and banks have expressed regarding housing finance reform, the future of the 30-year, fixed mortgage.
Privatization of the secondary mortgage market could favor adjustable rate loans, because private investors would be less willing to take on the interest rate risk, particularly in a low-rate environment.
“CUNA has serious concerns that the PATH Act may not provide credit union members with a sustainable secondary market that can provide the necessary liquidity and structure which will ensure the continuation of long term fixed rate mortgage products,” Cheney said. This is of particular concern for credit unions because more than 83% of credit union mortgages issued since 2008 have been fixed-rate mortgages; this signifies particularly strong member demand for a fixed-rate mortgage product.”
A privatized market could result in a significant price increase for fixed mortgages, Cheney said, and coupled with the risk of holding long-term fixed loans on credit union balance sheets, credit unions may stop offering the product.
Title IV of the bill includes a number of items on credit union regulatory relief wish lists. For example, one section would exclude a number of items from the qualified mortgage 3% cap on points and fees that make compliance unprofitable for some credit unions. Title charges, loan officer compensation, escrow charges for taxes and insurance, lender-paid compensation to a correspondent bank, credit union or mortgage brokerage firm, and loan-level price adjustments charged by Fannie or Freddie to offset risk factors would all be excluded from the cap under the bill.
The bill would also permit 40-year mortgages to qualify as qualified mortgages, waive some mortgage disclosure requirements and delay implementation of CFPB mortgage rules, scheduled to take effect in January 2014, for an additional year.
Also of interest to credit unions is a provision that incorporates the Financial Institutions Examination Fairness and Reform Act, which would establish an ombudsman outside of the NCUA to handle exam appeals, require that examiners to provide credit unions with documentation to support exam exception write-ups, and codify exam standards.
The bill would also delay implementation of Basel III capital standards for banks. Cheney said in his letter to Hensarling that he encourages the committee to similarly delay an NCUA rule under development that would reform capital standards by adding a risk-based requirement for credit unions with more than $50 million in assets.
While the bill has the support of House Republicans, a statement from House Financial Services Committee Ranking Member Maxine Waters (D-Calif.) suggests gaining Democratic support– necessary to advance the bill beyond the Democratic-majority Senate–will be a challenge.
“I am strongly disappointed in the chairman’s legislation, which is little more than an attempt to reinvent America’s housing finance system using the same kind of right-wing ideology that has eroded America’s middle class for decades,” she said in a statement. “This bill eliminates the 30-year fixed-rate mortgage as we know it and consigns future generations of homeowners to the types of high interest, balloon-payment mortgages that caused the financial crisis. This is by no means a bipartisan bill. By presenting such an extreme proposal–with no input from Democrats–the chairman stands in stark contrast with his colleagues in the Senate and has made it clear that bipartisan housing finance reform is not his priority.”
Janice Sheppard, senior vice president of mortgage lending and compliance for the $283 million Southwest Airlines FCU, testified before the full House Financial Services Committee July 18 on a hearing called specifically to discuss the bill. Sheppard, whose Dallas-headquartered credit union is located in Hensarling’s district, represented NAFCU.
In her opening statement, Sheppard cited a 2012 NAFCU survey that revealed more than 75% of respondents have a policy that restricts the percentage of real estate loans that can be held on their balance sheet, with a median limitation of just 35%. Without secondary market access, credit unions would be unable to meet member demand for mortgage loans, she said.
Sheppard also said that while NAFCU remains optimistic about the possibilities of the proposed utility platform, especially in terms of improving efficiencies, the trade is “concerned that the fundamental question of guaranteed access remains to be an uncertain proposition.”
Sheppard said the reg relief that excludes items from the qualified mortgage 3% fee cap would go a long way toward ensuring many affiliated loans, particularly those made to low- and moderate-income borrowers, attain qualified mortgage status.