Financial Reform-Part II

Article excerpt

The first heavy shoe to drop in Washington in response to the nation's worst financial crisis since the Great Depression was last summer's Wall Street Reform Act. From the beginning of the financial reform debate more than three years ago, policymakers from both parties put nearly everything on the table for consideration-except the status quo. Good ideas, bad ideas and even terrible ideas were proposed and debated. Primarily because of lobbying by community bankers, several pro-communitybank ideas were ultimately adopted in the broader legislation.

Now Congress is preparing to drop the second huge shoe, one that everyone knows must come-ending the government's conservatorship of Fannie Mae and Freddie Mac. In February, the Obama administration outlined three possible policy approaches to reconfigure not just Fannie Mae and Freddie Mac but the government's overall secondary market role. At stake, of course, is the stability, openness and, ultimately, effectiveness of the secondary market, including the ability of community banks to remain viable mortgage-market participants.

The administration's surprisingly open-ended options put nearly everything on the table-except the status quo. A smaller government role in the secondary market is a given, but Congress will decide just how small over the next several months. Obviously, the worst outcome would be a new secondary market dominated by too-big-to-fail financial institutions that would essentially shoulder community banks out of mortgage lending. (Yes, Wall Street's hive of lobbyists is still busily buzzing in Washington.)

Fortunately, ICBA has a much better alternative. Last month we recommended that Fannie Mae and Freddie Mac transition to a cooperative organizational model, one similar to the Federal Home Loan Bank system. …