The two huge government sponsored enterprises (GSEs) that have long been the main conduit for credit unions to sell mortgages into securities with some form of federal guarantee were both placed into conservatorship in September 2008.
Since then, a major concern has been what would happen should they ever be completely shuttered. Credit unions have become accustomed to dealing with the GSEs either directly or through credit union service organizations or other mortgage conduits—and the system has worked well.
The fear has been that without the GSEs, mortgage securitization would be taken over by a handful (you could count them on one hand without using your thumb) of very large banks that would favor their own mortgage originations over those of smaller players like credit unions.
CUNA is working to ensure that credit unions continue to have unfettered access to the secondary market. The Senate Banking Committee is currently considering legislation from Senators Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, that, with some modifications we support, would seem to do just that.
The legislation would close the GSEs after a several-year phaseout, spread their current functions over several private and public entities, and add a new source of private, at-risk capital to the mix. The result would be mortgage-backed securities with the full faith and credit of the U.S. government.
This would replace a system where the GSEs collect mortgages from lenders, set servicing standards, package the loans, issue securities with a government guarantee, and even hold large portfolios of the securities.
Under the Senate proposal, aggregators would collect the loans and prepare them to be sold into securities. These would likely be very large banks, but the bill also would create a Small Lender Mutual to serve the needs of credit unions and community banks.
The aggregators would then access a common utility, the “securitization platform,” to issue standardized, government-backed securities. To earn the government guarantee, however, the aggregators would first have to secure private coverage for the first 10% of loss on the securities.
The process would be overseen by a new federal agency, the Federal Mortgage Insurance Corp. (FMIC), modeled after the National Credit Union Share Insurance Fund and the Federal Deposit Insurance Corp.
Some fear this new setup would be more expensive than the current system, or at least what the legacy system used to cost before the financial crisis. In addition to an insurance premium to build a loss reserve at FMIC, there would be a fee from private guarantors to secure the 10% private coverage and a 10 basis point (bp) annual fee on all government-guaranteed securities to support affordable housing initiatives.
In this world, the overall cost of a 30-year, fixed-rate mortgage would be higher than it was before 2007 compared with Treasury interest rates. We believe, however, that the greater costs will apply to loans from all lenders, without favoring one group over another. The initial cost increase could be substantial—perhaps more than 50 bp on the annual percentage rate—as reserves are built to cover future losses. But it likely would decrease somewhat in later years.
A remaining concern we have with the proposal is the possibility that the same entity could be both a loan originator or aggregator and a guarantor—the provider of the 10% private loss coverage. If large banks could use their securities’ affiliates to subsidize the cost of the 10% coverage on their loans, that could put smaller lenders at a pricing disadvantage.
We have suggested amending the legislation to prohibit aggregators or lenders from also being guarantors.
It is far from certain whether this bill will become law, so don’t expect big changes in mortgage securitization soon. But this bill likely contains essential elements of what the new world will look like—and with a few improvements it should provide continued access for credit unions to the secondary market.
BILL HAMPEL is CUNA’s chief economist/senior vice president. Contact him at 202-508-6760.