Dark Shadows was a campy 1960s, pseudo-scary soap opera that tempted its audience with mysterious goings on just out of the viewer’s sight, at least until the next episode. Pending legislation that will reform regulatory and business oversight of Fannie Mae and Freddie Mac has that same feeling: there’s more to it than meets the eye.
The Need for Legislation and Financial Reform
The accounting issues unearthed at Freddie Mac in 2002/2003 and at Fannie Mae in 2004/2005 point up the need for stronger financial oversight of these Government Sponsored Entities (GSEs). Customers of financial institutions and financial service providers have a right to expect their safety and soundness. As I said in a recent interview with Credit Union Times, I fully support the need for legislation and regulation that strengthens the financial underpinnings of both GSEs.
Proposed financial reforms include increasing capital levels, establishing flexible capital requirements set by the regulator and receivership in the event of GSE financial distress. Enforcement of these reforms would be left to a new regulator, one that replaces both OFHEO and Federal Housing Finance Board. It’s difficult to argue with these proposals. After all, it’s in the Nation’s best interests that our housing finance markets remain strong. It’s becoming common wisdom that such legislation will be passed by the 109 th Congress. Senator Chuck Hagel’s (R-NE) Bill, S.190, proposes these reforms. It doesn’t stop there, however.
Hagel’s bill, co-sponsored by Senators Elizabeth Dole (R-NC) and John Sununu (R-NH), includes in its list of reforms a proposal to ‘clarify the mission’ of the GSEs by defining their permissible activities.
The Hagel Bill makes direct or indirect loan origination impermissible by the GSEs. It does so by defining primary and secondary mortgage activities. GSEs may engage only in secondary activities. Primary mortgage activities include any activities that involve direct contact with the borrower before or after the loan closes. Secondary activities, on the other hand, are those functions that take place only after a loan is closed and funded. Expressly excluded from secondary mortgage operations are activities such as underwriting. There’s the ‘bright line’.
We can all agree that Freddie Mac and Fannie Mae shouldn’t originate loans. Their charter expressly prohibits it. However, if the secondary market is prohibited from providing tools - - technology - - that streamlines the mortgage approval process for the primary market, then homebuyers and small- and medium-sized lenders lose.
If secondary market activities exclude underwriting, that means no more Desktop Underwriter™ or Loan Prospector ™. How will credit unions underwrite loans? There’s always the old-fashion way. Did anyone keep their IBM Selectrics? Think of it this way: all lenders use the same common tools today, so the field is level. Small lenders - - credit unions - - access and use the same tools as large lenders. The Hagel Bill proposes to change this: it prohibits Fannie Mae from providing Desktop Underwriter™ and Freddie Mac from providing Loan Prospector™ .
While losing access to the tools upon which our mortgage programs are built is bad, it gets worse. Automated Underwriting Systems like Desktop Underwriter™ do more than provide a recommended loan decision: they establish what the secondary market will buy. Without these systems, how will lenders know what to originate and how to originate it?
Bright Lines? More like dark shadows. Answering the ‘how will we know what to originate question’ is easy once we understand who’s behind the Hagel Bill. It’s the big banks, and, somewhat surprisingly, the Mortgage Bankers Association of America. If the Hagel Bill were to pass in its present form, mortgage lending in the United States will be controlled by a small number of very large lenders. Smaller lenders - - credit unions - - will have little choice but to use the proprietary underwriting systems of major banks. And, since credit unions will want to keep underwriting decisions at the point of sale, it’s highly likely we’ll have to use bank-designed and controlled origination systems as well.
That’s shadowy, yet there’s more. The proposed legislation extends to the new GSE regulator another power: Prior Approval. It sounds benign. It’s not. Herein lies the potential death of innovation. Let’s say credit unions were interested in working with Fannie Mae on a new loan product designed to make housing more affordable, like the 40-year mortgage. Fannie Mae did just that, without asking permission from OFHEO. That potentially changes under Prior Approval. How well could your credit union serve its members if it had to ask NCUA for permission for every new loan or savings product?
It’s easy to see what’s going on. Big banks want Fannie Mae and Freddie Mac’s activities curtailed so that they control housing finance. Once their ability to provide lenders with loan programs and lending technologies is erased, the Big Banks will step in to fill the void. Sound familiar?
It should. The American Banker’s Association has been tireless in its attempts over many years to curtail credit union activities. Banks were after credit unions long before the attack that resulted in HR 1151 became law. They’re at it again with ‘Operation Credit Union’. Often times one of the most successful strategies a foe can employ to defeat its opponent is by attacking on two fronts: one overt - - Operation Credit Union - - and the other covert - - GSE Reform legislation.
Legislation and Oversight v. Public Policy
Homeownership has been U.S. public policy since the Franklin Roosevelt Administration. His administration recognized that owning a home was central to the creation of economic security for the individual and for the Nation. The GSEs were chartered as a matter of public policy, to ensure that a constant source of affordable credit would be available to all geographic regions of the U.S. so that people everywhere could become homeowners.
It’s worked. Homeownership rates in the United States are high - - almost 70% of households own homes - - and are among the highest on earth. Our housing finance system is, in fact, the envy of the world. Access to credit is readily available; homeowners enjoy abundant financing options through a host of lending institutions, including credit unions. Fannie Mae and Freddie Mac are key players in that success. It is hard to imagine that our lawmakers intended to turn all housing finance decisions over to an oligopoly of large banks. It wasn’t their intent then, and should not be their intent now.
Legislation that tightens oversight and strengthens financial controls will make our system stronger than it is today. On the other hand, legislation that stifles innovation and turns control of housing finance over to a small number of large lenders will do nothing but drive the cost of homeownership higher and out of reach of many potential buyers. The result of fewer homeowners is a weaker U.S. economy.
What Can You Do?
Dark Shadows was pseudo-scary. Reform legislation that limits innovation and reduces the options available to homeowners and their lenders is truly scary.
Your first step is this: support legislation that strengthens financial oversight of the GSEs. Fiscal responsibility and adequate capital levels are hard to argue against. Second, oppose - - strenuously - - legislation that limits our ability as lenders to provide our members with affordable alternatives to housing finance. Everyday my credit union, BECU, offers its members closing costs that are at least $3,000 lower than the major lenders in the area. Where do your Congressmen and Senators stand on this issue? Now is the time to find out.
Third and lastly, stay close to this and other legislative issues that have the potential to restrict our ability to serve members. The banking industry is not going to give up. We can’t either.
Joe Branucci is Vice President and Chief Lending Officer of BECU, at over $5 billion in assets, it is the largest credit union in Washington and one of the top ten financial cooperatives in the United States. He is also President and CEO of Prime Alliance Solutions, Inc. a credit union service organization and recognized leader in innovative mortgage solutions serving credit unions nationwide. Prime Alliance ’s innovative approach to mortgage lending is in use by a network of almost than 600 credit unions, loan officers, real estate agents and builders nationwide. Prime Alliance customers account for 40 percent of all credit union mortgage lending, or roughly the size of a top 12 retail lender. For more information about Prime Alliance, refer to the Web site at www.primealliancesolutions.com .