Community lenders such as credit unions need to be at the core of any future secondary mortgage market, CUNA Chief Advocacy Officer Ryan Donovan wrote in American Banker Thursday. Donovan notes that between the upcoming vote on Mark Calabria to lead the Federal Housing Finance Agency and the release of housing finance reform principles by Sen. Mike Crapo (R-S.D.), Congress appears poised for action., and Donovan said it reform needs to be done right.

“The facts are straightforward. Consumers want and need responsible, affordable mortgage credit. Historically, it has been community lenders—credit unions and community banks—that have provided access to mortgage credit minus predatory features and without having to first be prompted by their regulators to do so,” he wrote. “It bears repeating that retail credit unions—rural, urban, large, and small—did not play a role in the subprime meltdown and ensuing financial crisis. Instead, as careful lenders and not-for-profit cooperatives, incentives at credit unions were already aligned in a way that helped ensure that lenders prioritized member owners’ interests over financial profits.

“Credit unions continue to prioritize member owners’ interests today by offering responsible, affordable mortgage loans,” Donovan added, noting that the ability to offer these products is highly dependent on the liquidity that the secondary mortgage market provides.

Donovan said a future housing finance system needs to start with the proposition that it should “function well for lenders of all shapes and sizes.”

This means community lenders cannot be priced out of the secondary market by giveaways to big banks and huge mortgage finance companies.

“Pricing parity is a crucial change in the way that Fannie Mae and Freddie Mac do business that only occurred as a result of their conservatorship,” Donovan wrote. “It is also a feature of Sen. Crapo’s housing finance reform outline. Going forward, it must be a core component of the modern secondary market.”

But pricing parity by itself won’t achieve equity from community lenders, Donovan also notes the secondary market must:

• Include an obligation for guarantors to serve all lenders to prevent guarantors from “cherry picking” lenders offering larger volumes of loans; and
• Preserve the cash commitment window, which is critical to community lenders attempting to meet consumers’ need for mortgage credit without operating a full-scale secondary mortgage operation.