CHLA Letter to FHFA Director Mel Watt – 7/01/14


2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
(571) 527-2601

July 1, 2014

The Honorable Mel Watt, Director
Federal Housing Finance Agency
400 7th Street SW
Washington, DC 20024

Dear Director Watt:

The Community Home Lenders Association (CHLA) writes to urge FHFA to take actions which could help facilitate a transition for Fannie Mae and Freddie Mac, in a manner that serves consumers and communities nationwide – by facilitating broad participation by community-based small and mid-size lenders, by preserving GSE infrastructure in order to maintain securitization access and a non-discriminatory cash window, and by preventing mortgage market concentration.

The Senate Banking Committee (SBC) recently approved S. 1217, bipartisan GSE reform. Regardless of the actual committee vote and disagreements over individual provisions, we believe there is a broad bipartisan consensus around the key objectives in that bill, which we believe are: (a) maintaining a federal guarantee in order to preserve the 30 year mortgage, (b) preservation of a cash window and securitization platform to ensure access for small and mid-sized lenders, (c) private sector risk sharing to reduce government risk and achieve private sector discipline, and (d) protecting taxpayers by ending the pre-conservatorship implied guarantee, which had created a “private sector gain, public sector loss” model.

We appreciate the comments in your recent speech at Brookings that it is up to Congress to enact comprehensive GSE reform. However, we are mindful, as the 2008 HERA GSE bill demonstrates, that it can take many years for Congress to finalize complex legislation. In the interim, the 2014 FHFA strategic plan identifies activities that FHFA and the GSEs can pursue that could be important transitional steps to GSE reform, such as expanded risk sharing pilots and development of a common securitization platform.

Following are CHLA recommendations for activities which we believe could facilitate a transition to sound GSE reform and which are consistent with the Senate GSE bill and with conservatorship objectives:
1. Conduct risk sharing pilots in a manner that protects consumers and maximizes competition in mortgage origination markets, by using structures which:
(a) preserve the ability of small and mid-sized lenders to securitize loans,
(b) prohibit vertical integration, in order to prevent entities that provide the risk sharing from leveraging that in order to exclusively deal with or favor their mortgage lending affiliates,
(c) prohibit volume discounts, with respect to origination volume of participating mortgage lenders,
(d) test out the feasibility and comparative risk and pricing of using a loan level guarantee.
2. Conduct extensive research into the impact of various GSE reform options on the preservation
of an effective cash window that fully meets the needs of smaller lenders under competitive rates
and terms – including comparisons of S. 1217 and other options that restructure or transform
Fannie Mae and Freddie Mac through an end to the current conservatorship.
3. Complete work on a common securitization platform and single security, in order to increase
competition by creating a more level playing field for market participants.
4. Adopt immediate G Fee parity, as well as non-discriminatory treatment in all other areas such as
LP/DU waivers and seller-servicer agreement terms – in order to avoid preferential treatment to
TBTF institutions and to preserve consumer access to community-based mortgage lenders under
competitive rates and terms.
5. Evaluate issues of access and affordability under risk sharing pilots which compare requirements
of S. 1217 with other risk sharing levels, to address: (a) the impact on mortgage rates, (b) the depth
of capital in the market to meet risk sharing and capital requirement levels, (c) the extent to which
the needs of low and moderate income homebuyers are met, and (d) the extent to which the needs
of homebuyers in all geographic regions – including urban, suburban, and rural areas – are met.
Enclosed is an addendum that explains these recommendations in more detail.

We thank you for consideration of this request.

Sincerely Yours,




CHLA applauds FHFA’s decision to triple the volume of risk sharing pilots, to bring private capital back to mortgage markets, to reduce government risk, and to foster market discipline. However, CHLA believes that a top priority for risk sharing pilots should be to conduct them in a manner that maximally protects consumer choice and promotes competitive pricing, through approaches that preserve the ability of small and mid-size lenders to participate. This becomes important if and as FHFA moves from selling off risk after the fact to an approach that uses up-front risk sharing or creates a TBA market in order to better serve borrowers. Specifically, CHLA recommends:
* Preserving the Ability of Small and Mid-Size Lenders to Securitize.  An important way that consumers are served through competition is that the current system allows mid-sized and even some relatively small mortgage lenders to directly securitize GSE loans. This was possible both under the pre-conservatorship and post-conservatorship worlds because accessing securities markets for this purpose was relatively simple. However, any new requirement to do risk sharing creates new complexities and economies of scale that may undermine the continued ability of such lenders to do securitizations. As a result, there is widespread concern that mortgage markets in such environment would be dominated by a few TBTF banks and other financial firms, which would be bad for consumers and the housing market.
These concerns are caused by a number of anticipated factors, including the ones listed just below. Therefore, CHLA believes that the FHFA and the GSEs not just carry out risk sharing pilot transactions to determine what works and at what cost – but also by making it a fundamental priority to do so in a manner that preserves the ability of small and mid-size lenders to continue to be able to securitize loans.
* Prohibiting Volume Discounts.  CHLA is pleased both that FHFA’s current policy and the policy in S. 1217 was for G Fee parity – where the fee the government charges for all federally guaranteed loans is the same regardless of the loan volume generated by the mortgage lender. [Of course, as noted in Section 4, CHLA continues to be disappointed that G Fee pricing discrepancies still exist in practice].
However, under a risk sharing model, a significant portion of the risk will be transferred from the federal government to private sector entities, and with that the fees that pay for that risk. Thus, even if there is G fee parity, there is a significant new opportunity for private sector participants providing the risk sharing to discriminate based on volume. CHLA is disappointed that S. 1217 did nothing to prohibit or even discourage such a practice.
CHLA fully supports the concept of pricing differences based on the risk of the loans. However, as a general policy, CHLA believes it is inappropriate to provide a federal guarantee on mortgage backed securities – and allow private entities to use that guarantee to discriminate based on volume of the lender. Such a practice would contribute significantly to mortgage market concentration. Moreover, it is inappropriate to allow a competitive advantage to FDIC-insured and other TBTF entities as a result of such status. Finally, we saw the negative effects of the bias of favoring larger entities just because they were large through the behavior of Fannie and Freddie leading up to the housing crisis, where they provided more favorable pricing for firms like Countrywide. Whether for the purpose of building market share, or because it seems safer to do business with TBTF or other large entities, this is not appropriate.
Therefore, as FHFA implements risk sharing transactions, including potentially moving towards doing up-front risk sharing, CHLA urges FHFA to strictly prohibit pricing discrimination based on volume. This is important to protect those borrowers who work with smaller community based lenders.
* Vertical Integration.  As S. 1217 was debated, a major concern was vertical integration, under which entities could carry out multiple functions with respect to the provision of risk sharing or acting as an aggregator and with respect to mortgage loan origination. Put simply, large banks and other financial firms could use their market size and clout to carry out one function (risk sharing or aggregation) and leverage that to favor or deal exclusively with or favor their mortgage origination affiliates. Such an
outcome would contribute to mortgage market concentration and hurt consumers. Therefore, CHLA was pleased to see the addition to that bill of important protections against vertical integration.
As FHFA implements risk sharing pilot transactions, CHLA strongly urges FHFA to put in place similar prohibitions, to ensure that the risk sharing models and practices it pursues provide an open access for all mortgage lenders, and that entities that provide risk sharing or aggregation do not use those activities to exclusively deal with or favor their own mortgage lending affiliates.
* Exploring Loan Level Guarantees.  CHLA  notes that S. 1217 requires that the risk sharing take place at the MBS level – and does not permit a model under which the guarantee is made at the loan level, with a higher first loss position. CHLA also notes that the risk sharing pilots that the GSEs have done to date have effectively done the same. While we understand that a guarantee at the MBS level may make it less likely that the federal government will have to advance any funds, this may expose the government to more overall risk than a loan level guarantee, which as noted, would have deeper first loss coverage.
We would also note that the private mortgage industry has more predominately provided guarantees at the loan level, and therefore we would strongly urge the FHFA to aggressively experiment with this model in its risk sharing pilot. Of course the ultimate goal would be to calculate and estimate the risk sharing levels at which a loan level guarantee is comparable to an MBS level guarantee.
There are other collateral benefits to exploring this approach. CHLA believes that the provision of loan level first loss risk sharing is probably better to create a competitive market for the provision of risk sharing, for a number of reasons which include our concerns about vertical integration by large banks/securities firms and the presence of rate regulation for insurance companies. In addition, we believe that a loan level guarantee may be better for loss mitigation, making it easier to pull loans out of pools and perform effective loss mitigation to help keep homeowners in their home.
Fannie Mae and Freddie Mac currently provide a cash window, which provides access for small and mid-sized lenders to participate in originating these federally guaranteed mortgage loans. One of CHLA’s top concerns with regard to either GSE reform or structural changes to Fannie Mae and Freddie Mac is the preservation of such a cash window.
S. 1217 provided for the ultimate dissolution of Fannie Mae and Freddie Mac. CHLA was pleased with the commitment in this bill of a replacement cash window through creation of a mutual cooperative, including government capitalization funding, transfer of GSE infrastructure, and a Congressional report, prior to any such dissolution, which studies whether the new cooperative is fully meeting the cash window needs of small lenders.
Nevertheless, CHLA continues to have concerns whether this transformation can be accomplished in the real world, without putting cash window access for small lenders at risk. There are other options for transforming or restructuring Fannie Mae and Freddie Mac to meet taxpayer concerns without their dissolution. CHLA believes that FHFA can further the public debate on these issues, not just through risk sharing pilots, but also through a thorough consideration of other options in terms of the critical objective of preserving an effective cash window.
Therefore, CHLA urges the FHFA to undertake a comprehensive analysis of the components of Fannie Mae and Freddie Mac that are critical to the provision of a cash window, including (a) the different functions carried out by Fannie and Freddie which are essential to a cash window, (b) the infrastructure components of Fannie and Freddie that are essential to a cash window, (c) capital needs necessary to carry out an effective cash window, and (d) other features which impact the ability to continue a cash window function, in order to fully meet the cash window at competitive rates and terms.
Such analysis should consider these issues in the context of a reformed mortgage finance system under which risk sharing is required. It should also explore the impact of different reform and restructuring
alternatives with respect to the impact on preserving a cash window, including the following (a) S. 1217, (b) transforming Fannie and Freddie (either separately or in combination) into a cooperative, (c) reprivatizing Fannie Mae and Freddie Mac through an IPO or other approach, and (d) other financial restructuring alternatives which may be available to end the conservatorship.
CHLA applauds FHFA’s announcement that it will continue to work on creating a Single Securitization Platform. This is an important component to help protect consumers by making access to the federal guarantee available to small and mid-sized lenders on competitive rates and terms – and thereby maximizing competition and the ability of consumers to obtain loans through community-based lenders.
CHLA also strongly supports creation of a single security. This would further these same objectives, by making it harder for the big banks and other TBTF lenders from using market share to gain pricing advantages due to that status and implied government backstop to price other lenders out of the market.
Consumers and homebuyers benefit from a competitive mortgage market, particularly one in which rural and other underserved borrowers have access for loan origination and servicing through community based lenders. However, policies such as volume discounts and unequal treatment with regard to other terms and conditions of doing business with Fannie and Freddie undermine the goal of a competitive market.
It has now been six years since the FHFA put Fannie Mae and Freddie Mac into conservatorship, effectively under government control We urge FHFA to immediate institute a policy of full G Fee parity, and to eliminate any other policies which discriminate based on size or volume, including in the areas of DU/LP waivers, and the terms and conditions of seller-servicer agreements.
During Senate debate on S. 1217, there was much discussion about the impact of risk sharing on “access and affordability.” Questions included: (a) the impact on mortgage rates of the 10% capital requirement backing up risk sharing, (b) whether there would be adequate depth of risk sharing capital to support national mortgage market needs without driving up rates and costs, (c) the impact of risk sharing on fully meeting the needs of low and moderate income homebuyers, and (d) the impact of risk sharing on meeting the needs of homebuyers in all geographic regions, in urban, suburban, and rural areas.
CHLA recognizes that complete answers to these questions can only be fully determined when a nationwide risk sharing regime is fully in place. However, we encourage FHFA to maximally use the risk sharing pilot pilots to gain knowledge to the answers to these important questions.

[CHLA – Addendum to FHFA letter, dated July 1, 2014]