WASHINGTON — The discounts that Fannie Mae and Freddie Mac used to offer large originators for selling them bulk bundles of mortgages continue to haunt small lenders, who worry a new housing finance system could revive the practice.
At a Senate Banking Committee hearing on Thursday, bank and credit union executives said they frequently felt sidelined by the government-sponsored enterprises in favor of the biggest U.S. banks because of volume discounts and other practices. They also accused big banks of not passing any savings from their sweetheart deals on to consumers.
“It definitely put us at a competitive disadvantage,” said Jack E. Hopkins, president and CEO of the $770 million-asset CorTrust Bank in Mitchell, S.D. “But I think, many times, we found that the rates were fairly similar, so it was really just a transfer of profits to the large institutions from the GSEs. And so I felt that they were pocketing the money at the expense of the borrower.”
Small lenders blame the practice for enabling the top 10 banks to double their mortgage market share to 80% between 1998 and 2010. They also said it helped to give rise to the financial crisis.
“If the entity can earn more revenue because they're sending in more volume, does that create an opportunity for unintended consequences, such as, you take shortcuts on making the loans?” said Tim Mislansky, senior vice president at the $3.6 billion-asset Wright-Patt Credit Union in Beavercreek, Ohio. “That's some of what we saw during the financial crisis when lenders that no longer exist today, such as a Countrywide or a Washington Mutual, were receiving volume discounts but the quality of their paper wasn't there.”
Brenda Hughes, senior vice president at the $624 million-asset First Federal Savings Bank of Twin Falls in Idaho, said the practice simply allowed the larger institutions to “undercut” the smaller lenders and “gives them the opportunity to go out and do more targeted marketing and the inability for us to compete in that space makes us a little uncompetitive.”
While Fannie and Freddie suspended the practice following the financial crisis, small lenders are worried that a new system could revive it. They are particularly worried about a possible bipartisan plan that would replace the GSEs with multiple private competitors backed by a catastrophic government guarantee. In such a system, the new players could each cut different deals with big banks, leaving small lenders disadvantaged.
Having many more GSEs could create other problems, some argued.
“It's important that we don't have multiple GSEs that enter the market,” said Wes Hunt, president of Homestar Financial Corp. “It is already a complex market, and when you think of the complexity of the market, and you think of a small lender, the more complex it is, the more your legal costs rise; your internal costs rise to try to keep up with all of the differences within the different GSEs.”
Small lenders are particularly worried about big banks’ ability to either own a guarantor or purchase a stake in one. That could also give them a competitive advantage that forces smaller players out of the market.
“It’s opening a Pandora’s box,” said Bill Giambrone, president and CEO of Platinum Home Mortgage and president of the Community Home Lenders Association.
Small lenders’ message won support from some lawmakers during the hearing.
“We can’t have a thriving mortgage market if small lenders don’t have access and the big guys do,” said Sen. Elizabeth Warren, D-Mass.
Senate Banking Committee Chairman Mike Crapo, who is writing the GSE bill along with Sen. Sherrod Brown, the panel’s lead Democrat, said a level playing field for large and small lenders is one of his core principles for housing finance reform.
But accommodating the concerns of small institutions may prove challenging. During the hearing, Warren suggested that whatever entities replace the GSEs could be banned from offering volume discounts and prevented from owning part or all of any guarantor.
Another tricky issue is how any new system treats affordable housing, a key concern of Democrats. Warren told reporters after the hearing that there is still a bridge to gap when it comes to providing affordable housing.
“Small lenders are here asking for government intervention to make sure that they have a chance to be a competitive in the mortgage market. My Republican colleagues seem to support that and I do as well,” she said. “But when the question comes up about those kinds of questions about low-income and minority borrowers having access to the mortgage market as well, the Republicans have not been as enthusiastic about government intervention. I don’t think you can have it both ways.”
Small lenders also echoed the industry’s argument that some type of explicit government guarantee remains necessary to offer affordable loans.
“The explicit guarantee is obviously going to help keep the rates low for the homeowner on a going-forward basis,” said Charles M. Purvis, president and CEO of the $2.9 billion-asset Coastal Federal Credit Union in Raleigh, N.C. “It's part of the affordability that you're looking for, particularly for first-time buyers.”
