Washington Watch

ICBA outlines housing finance reform principles

By Ron Haynie

While Washington and much of the rest of the nation has been preoccupied with questions over the federal budget and debt ceiling, policymakers have nevertheless continued to move ahead on fundamental reforms to the housing finance system. With the House and Senate separately advancing vastly different proposals, ICBA released a comprehensive white paper that leaves no question about where the community banking industry stands on the issue.

“Housing Finance Reform: A Community Banking Perspective” details the community banking industry’s role in the housing finance system, principles for reforming the secondary mortgage market and viewpoints on proposed reforms. Here’s a quick rundown.

Industry essentials

First of all, the white paper offers some basic background information on community bank mortgage lending. Not only do community banks account for up to 20 percent of the market, they also provide a disproportionately large number of loans to low- and moderate-income borrowers and strengthen the mortgage and housing markets with their conservative underwriting practices. They are also more likely to hold mortgage loans in portfolio to serve the unique needs of their customers, particularly property owners in small and rural communities.

Nevertheless, even portfolio lenders need robust secondary market access to meet customer demand for 30-year fixed-rate loans. In a recent ICBA survey, nearly 30 percent of community bank respondents said they sell half or more of the mortgages they originate into the secondary market.

This liquid market allows community banks to effectively hedge interest rate risk, offer rate locks to their customers with relative ease, retain servicing rights, enjoy a virtually paperless loan-delivery process and generally receive funding from the government-sponsored enterprises in cash within 48 hours. And the process works as intended by freeing up capital for additional loans.

Rules for reform

With housing and household operations making up 20 percent of the U.S. economy, ICBA’s white paper warns against reforms that would disrupt the housing finance system, limit community bank access to the secondary market, or give control of the market to Wall Street institutions.

Further, it provides key features of a successful secondary mortgage market, which must: provide equal and direct access for community banks on a single-loan basis that does not

  • require community banks to securitize their own loans;
  • preserve the relatively simple process of selling loans for community banks and other small lenders;
  • be well capitalized, liquid and reliable enough to effectively serve the entire mortgage industry in all markets, at all times, even in challenging economic circumstances;
  • ensure robust oversight by a strong and competent regulator;
  • not appropriate customer data for cross-selling of financial products;
  • provide originators the option to retain servicing and ensure servicing fees are reasonable;
  • have a limited focus on supporting residential and multifamily housing; and
  • maintain an explicit government guarantee against catastrophic loss.


With this positive reinforcement in place, “Housing Finance Reform: A Community Banking Perspective” also spotlights some existing proposals that are unworkable for the industry. For instance, the Federal Home Loan Banks should not be the sole aggregator for community banks, which would limit the industry’s secondary market options and potentially jeopardize the FHLBanks’ primary function of providing advances.

Further, ICBA’s white paper challenges the idea that covered bonds are an adequate alternative to the secondary market because they are capital intensive, which makes them infeasible for all but the largest banks. Requiring smaller lenders to sell their loans to larger banks would only fuel further industry concentration and consolidation. The same goes for complex credit enhancements that require the management of multiple counterparties, which would create risks too great for small lenders to bear.

Easy does it

Generally, in creating a new housing finance system, policymakers must not destroy liquidity for all but the few largest players, limit access and options for smaller lenders, or impose excessive costs that would deter community bank participation. As ICBA’s white paper notes, the worst outcome would be to allow a small number of financial mega-firms to mimic the size and scale of Fannie Mae and Freddie Mac under the pretense of a private-sector solution.

That is why ICBA is ensuring the community banking industry’s voice is heard. While the debate remains in its infancy, community banks must remain at the table to ensure policymakers do not mortgage the industry’s future.