Remaking Housing Finance
Keller, Alan, Independent Banker
As policymakers reconsider the government's role in the secondary mortgage market, ICBA proposes an alternative cooperative lending model
The debate over the future of housing finance-presenting high stakes and highly complex policy issues that will not be resolved quickly-will occupy official Washington for the foreseeable future. The major stakeholders have only begun to map out their positions.
The Obama administration released its long-awaited report, "Reforming America's Housing Finance Market," to Congress on Feb. 11. It was encouraging to see the White House recognize that smaller lenders and community banks serve their communities more effectively than larger lenders. Access to credit for these communities, along with the related imperatives of preserving a competitive market for credit and minimizing consolidation, are all criteria by which the administration is evaluating proposals for remaking the government's role in the secondary mortgage market.
The administration's report considers three such proposals: nearly complete privatization of the housing finance system, a privatized system with a government guarantee that becomes effective only during times of crisis and a privatized system with catastrophic government reinsurance that is buffered by private capital. Even the third catastrophic reinsurance option would entail a more circumscribed role for the government in the housing market, emphasizing private capital as the primary source of mortgage credit and the first to bear losses.
It's become increasingly clear that whatever replaces Fannie Mae and Freddie Mac will be a radical departure from the old model. When the administration signaled that it was not willing to defend the pre-crisis government footprint in housing finance, the parameters of the debate shifted. Government's historical role in housing is off the table.
A housing finance system with a smaller government footprint, properly designed, can preserve the vital role of community banks. The worst outcome, for community banks and consumers, would be a system dominated by a few large, too-big-to-fail banks, with community banks forced to the sidelines. That's why ICBA has set forth its own proposal.
ICBA recommends that Fannie and Freddie be replaced by cooperatives that are owned by lenders that purchase stock commensurate with their loan sales. The co-ops would be governed on a onecompany, one-vote basis, and board seats would be apportioned to ensure that lenders of all sizes and classes are represented. They would be banned from operating in the primary market so that they cannot unfairly compete with mortgage originators.
The ICBA co-op model would protect the interests of community banks and protect taxpayers from another government bailout. Mortgage-backed securities issued by the co-ops would be guaranteed by a fund capitalized by co-op members as well as third-party guarantors. Resources would be set aside in good times to prepare for bad times. Only conservatively underwritten loans would be purchased.
The government would provide catastrophic-loss protection, for which the co-ops would pay a premium. This guarantee, fully and explicitly priced into the guarantee fee and loan-level price, not only would provide credit assurances to investors, sustaining robust liquidity even during periods of market stress, but-a point less often noted-also enable the co-op securities to be exempt from SEC registration and trade in the to-be-announced (TBA) forward market. …