Housing Finance Reform: Access to the Secondary Market for Small Financial Institutions

Read the full testimony as an Adobe Acrobat PDF

Chairman Johnson and Ranking Member Shelby, thank you for the opportunity to testify today.

This hearing is a timely one. For many years community financial institutions have been denied fair and equal access to the secondary market.

Earlier this year Jay Brinkmann , chief economist for the Mortgage Bankers Association, summed up the impact this had on competition:

"...[t]he pricing strategies that Fannie and Freddie pursued contributed to the concentration of mortgage lending within the largest banks. The GSEs offered reduced 'guarantee fees' for their largest customers, which placed smaller lenders at a competitive 'disadvantage.'" "NY Fed Thinks Megabanks May Be the New GSEs," National Mortgage News, March 16, 2011.

Banks prosper by making prudent loans with an adequate return and maintaining a reasonable cost structure. Community banks have long prospered by establishing and maintaining a relationship with their customers. This traditionally was accomplished with equal parts of small-business, consumer, and commercial real estate lending, plus some fee income on serviced loans. Today 97% of our banks are community banks and they are increasingly finding this business model under siege.

In the mortgage lending arena our nation's community financial institutions face two continuing but related threats to their future. While community financial institutions did not cause the financial crisis, they are being subjected to what will likely amount to ten thousand or more pages of regulations spawned by the Dodd Frank Reform Act. The Qualified Residential Mortgage (QRM) and Qualified Mortgage (QM) statutory provisions totaling just 12 pages have already ballooned to about 800 pages of proposed rules. These regulations disproportionately impact community financial institutions and are a threat to their profitability since they needlessly add costs that act the same as a capital surcharge.

Second, this regulatory overload adds insult to injury. Fannie and Freddie (the "GSEs") had a long history of giving their largest and riskiest customers lower guarantee fees, while charging community lenders much higher fees. This denied community financial institutions fair and equal access to the secondary market, disadvantaged them economically, and in many cases resulted in their handing over their best customers to their large bank competitors. Discounting for volume is a recipe for disaster in the credit guarantee business. Additionally their government guarantee allowed the GSEs to accumulate huge portfolios and distort pricing for all competing mortgage investors. For years this disadvantaged community financial institutions and now the taxpayers have been disadvantaged to the tune of over $160 billion.

As far back as 1995 Fannie's top 25 volume customers, led by Countrywide, benefited from substantially lower guarantee fees than Fannie's 1200 smallest customers. This trend intensified over the course of the next decade. In 2007 Countrywide accounted for one in four loans purchased by the GSEs.

Edward J. Pinto is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.