Credit Unions Keeping an Eye on Progress in Tightening GSE Regulation

WASHINGTON – Just how much of an impact – if any – the tightening of the regulation of housing Government Sponsored Enterprises Freddie Mac and Fannie Mae will have on credit unions’ mortgage lending activities is still being debated. Credit unions are following development closely even though the outcome of the initiative is not a sure thing. Eric Richard, CUNA’s general counsel stressed that the transfer of regulation of housing GSEs from the Office of Federal Housing Enterprise Oversight (OFHEO) to the Treasury “is not necessarily a done deal. It’s relatively late in the congressional session, and especially in the Senate you never know what’s going to pass in the final week of the session.” However, Richard added, “Both the Administration and the GSEs at this point are passively supporting a move of the regulation to Treasury, so legislation has a good shot when Congress decides to take up the bill. It has a pretty good chance of passing.” If that happens, says Richard, “it will not necessarily be a bad thing for credit unions. It will depend on what Treasury does.” He added that, “Treasury is a good choke point for a lot of our enemies,” and cited, by example, Treasurys success with getting NCUA to cut back some liberalization it was considering putting in to effect on member business lending. In addition, Richard said the deputy secretary of the Treasury opposed changes NCUA wanted to make to Prompt Corrective Action (PCA). Even before the Bush Administration, Richard said Treasury was “the inventor” of PCA for credit unions and statutory capital standards for CUs. In addition, the federal agency has had “limited views” on what CUs’ power of authority should be and what changes should be made regarding credit union regulation. Richard worked for eight years at Freddie Mac as their legislative and regulatory counsel before coming to CUNA, and while he worked there he helped craft the statute that’s currently being criticized. The current pressure to move the regulation of the GSEs over to Treasury “is not new,” he said. “When I worked at Freddie Mac, the goal of the GSEs was to have as little regulation as possible. They didn’t have any known safety and soundness problems. Their focus was on carrying out their Congressional mission to help provide homeownership to Americans, so they saw no need for a lot of regulations. So there was a lot of contention concerning the regulation of the GSEs even back then,” he said. As for the Treasury, Richard said the federal agency “has never been a fan of GSEs”, and there’s an understandable reason for that, he said. “Treasury’s job is to protect the Federal purse, and they perceive GSEs as being a potential threat to that purse,” he said. “If Congress moves the regulation of the GSEs to Treasury, it will increase the tension between GSEs’ fulfillment of their mission under HUD and Treasury’s concern to protect the safety and soundness. The trick will be striking the right balance between the two.” Still, said Richard, “it’s hard to have a regulator that doesn’t believe in you.” Richard offered that “there will always be a lot of people who think the government should not be involved with housing, but the federal government has been involved in housing from top to bottom for years.”He further offered that, “the people who are pushing for the tightened regulation of the GSEs are the people who would like to have the secondary mortgage business the GSEs have. These businesses can’t compete with the GSEs now because Freddie and Fannie have government backing. “The GSEs’ potential competitors would like to take over the secondary market. They’re exploiting the current situation,” said Richard. At press time, House Financial Services Committee Chairman Michael Oxley (R-Ohio) had released the witness list for the hearing scheduled for Sept. 25 on H.R. 2575, the Secondary Mortgage Market Enterprises Regulatory Improvement Act and legislative proposals made to the Committee on Sept. 10 by Treasury Secretary John Snow and Housing and Urban Development Secretary Mel Martinez (CU Times, Sept. 24). At that hearing Martinez recommended that the “core element” of the GSE’s charter, the housing goals, be retained at HUD, the same as they are now. Among the witnesses who are expected to testify at the Sept 25th hearing were: Armando Falcon Jr., director, OFHEO; John Korsmo, chairman, Federal Housing Finance Board; George Gould, director, Freddie Mac; and Franklin Raines, chief executive officer, Fannie. Nine additional witnesses were scheduled to testify at the hearing. In his Sept. 10th testimony to the Committee, Snow proposed that the Treasury have authority to “set prudent and appropriate minimum capital adequacy requirements for the GSE.” If that happens, Richard said he questions whether Treasury would set “fair” capital requirements. “If they’re too high, then the added cost of doing business would affect the GSEs’ ability to offer mortgages at low rates,” said Richard. Snow also recommended the Treasury have the authority to approve any new products from the GSE. Richard is concerned that if that happens, it could create opportunities for banks to restrict the GSEs’ product offerings to credit unions. At a time when credit unions holding a large amount of their mortgage portfolio in fixed rate mortgages are being encouraged to sell some of their mortgages on the secondary market, any lessening of the GSEs’ ability to offer low rate mortgages could make it more difficult for credit unions to sell their products on the secondary market. That’s why Don Charron, senior vice president of lending for Suncoast Schools FCU, Tampa, Fla. has been following the developments. Suncoast has $1.2 billion in its mortgage portfolio. It sells all of its 30-year fixed rate mortgages to Fannie Mae. Charron said Suncoast Schools has a designated percentage of fixed rate mortgages it keeps in its portfolio. If the percentage goes above that designated point, the $3.8 billion credit union would sell some of its 15-year fixed rate mortgages. “If anything happened that would make it harder for us to sell on the secondary market, that would be a big problem for us,” said Charron. “It’s part of risk management to sell-off part of our portfolio when we determine it’s necessary.” Keith Sultemeier, CFO, Security Service FCU, San Antonio, Texas is concerned that any added cost of doing business with the GSEs will wind up being passed on to consumers and make mortgages more expensive for them. “Everyone will be forced to deal with tighter regulations,” he said, “and someone will have to pay for that. The increased cost will end up being added to the cost of the equation for consumers.” Sultemeier admits he’s a firm believer in `less government is good government.’ “The more players there are in the pie, the more inefficient it can be,” he said. SSFCU has a $300 million mortgage loan portfolio. It currently sells on the secondary market through private investors, but it plans to begin selling directly to the GSEs by yearend `”because it’s cheaper,” he said. “The oversight of the GSEs needs to be tightened, and OFHEO should be subject to a higher level of oversight. But I’m not sure a government agency with a team of examiners like the Treasury is the way to go,” said Sultemeier. NAFCU meanwhile is less concerned any increase in the regulation of Freddie Mac and Fannie Mae will have “any impact at this point” on credit unions’ mortgage lending activities, said the trade association’s Communications Manager John Zimmerman. “Hopefully whatever comes out of Congress will improve the safety and soundness of the GSEs,” he said. – [email protected]