Southwestern Illinois mortgage banking professionals say a federal housing reform bill introduced to replace Fannie Mae, Freddie Mac and the FHA with a new agency to regulate the industry comes too late and reaches too far.
On June 19, U.S. Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.)’s introduced a bill calling for liquidating Fannie Mae and Freddie Mac within five years, replacing them - and the Federal Housing Authority - with a new government agency known as the Federal Mortgage Insurance Corp. According to the bill, the FMIC would function as a government reinsurer of mortgage securities that would reinforce private capital in a crisis.
Chris Brown, vice president and senior loan officer at Mortgage Makers in Edwardsville, says although the premise of the legislation makes sense, the timing is several years too late. The timing of the Corker-Warner bill, he says, makes no sense because Fannie and Freddie are now turning as big a profit as they ever have.
“The U.S. government seized the mortgage finance firms in 2008 to rescue them from insolvency, spending a total of $187.5 billion to keep them afloat,” said Brown. “Fannie Mae and Freddie Mac, which charge lenders a fee in return for guaranteeing principal and interest on mortgages, are now posting record profits. My biggest concern here is that, once again, government is trying to go fixing something that’s already been fixed. We’re reinventing the wheel. As a whole, I agree that something needs to be done. But to take two entities that were virtually bankrupt five years ago and say, ‘Now let’s wipe these completely out and create a whole new level of bureaucracy,’ that makes no sense.”
A similar example of the federal government regulating after the fact, says Brown, occurred with the Home Ownership and Equity Protection Act of May 2, 2013. Although the intent of this act was noble, Brown says - it was designed to protect uneducated loan applicants from being granted residential mortgages beyond their financial means - its timing and construction were faulty.
“What the feds decided was, ‘We’re going to pick the Prime Index. But because the Prime (interest rate) doesn’t move as fast as the market moves, every loan is more than 3 percent above prime. Now we’ve enacted another lending law that doesn’t make any sense and only adds another layer of regulation,” he added.
Brown says the Consumer Financial Protection Bureau continues to regulate subprime loans based upon products that have not even existed since the financial meltdown in 2008. Most of what the federal government has done in terms of mortgage banking regulation would have been great if it had taken place two or three years back, he said.
“Look at the TSA (Transportation Security Administration),” said Brown. “I’m afraid of the same kind of debacle in our industry if we create yet another new kind of behemoth. It will probably cut a huge amount of people out of the mortgage market. Right now, if you’re not a really strong candidate on all fronts, you’re not getting a conventional loan. And because conventional doesn’t have the edge to it that it used to have - such a narrow margin of people can quality these days - the FHA went from having mortgage insurance premiums of .32 percent of the loan amount, or $300 a year on a $100,000 home, to 1.35 percent or $1,350 per year today on that same $100,000 home. That’s a 500 percent increase over the last four years. Also, the closing costs have essentially doubled due to the compliance costs. At a closing, as loan officers we’re now required to present the closing costs to you four different ways,” he added.
Nick Parisi is president of the Illinois Mortgage Bankers Association. The association’s official position on the Corker-Warner bill is that it’s a good start. Parisi, however, would like to see Congress go further. The IMBA and its national affiliate, Mortgage Bankers Association, is in the process of drafting a five-part concept paper series for Capitol Hill that outlines specific steps the Federal Housing Finance Agency can take immediately to encourage greater private capital participation. At press time, three of the parts had been completed.
“Since 2008, we have seen significant and positive changes in the mortgage finance industry in Illinois,” Parisi said. “However, one of the drawbacks has been the lack of private capital in the market because of the enormous role GSEs (government-sponsored enterprises) now play.”
The MBA’s first proposed reform, he says, calls upon the FHFA to direct Freddie Mac securities to have an identical structure to Fannie Mae securities to ensure that the two offerings are more interchangeable. Such a reform, Parisi says, will reduce the cost to taxpayers while also increasing competition in the secondary mortgage marketplace.
The association’s second proposed reform contends that private capital should play a much greater role in the mortgage market, especially at the beginning of the loan process.
Thirdly, the MBA argues that any reform to the secondary market must provide smaller lenders with equal access to the market, while also containing an explicit federal guarantee for certain mortgage-backed securities.
In addition to the Corker-Warner bill, U.S. House Rep. and Financial Services Committee Chairman Jeb Hensarling (R-Texas) has proposed a bill that calls for fully privatizing the mortgage finance market.