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In this issue of The Institutional Risk Analyst, we feature a discussion with Scott Olson, Executive Director of the Community Home Lenders of America (CHLA), which reflects the recent merger of the Community Home Lenders Association and the Community Mortgage Lenders of America. Olson now represents the largest DC trade association focused on independent mortgage banks (IMBs), which is CHLA's single largest membership block. Olson worked for 20 years on Capitol Hill and served on the House Financial Services Committee as Housing Policy Director under Chairman Barney Frank (D-MA).
The IRA: Scott, there is a lot going on in Washington that impacts IMBs very directly, including new capital requirements for nonbank mortgage companies from the Federal Housing Finance Agency (FHFA) and Ginnie Mae and the prospective merger of Black Knight (BKI) and Intercontinental Exchange (ICE). What are the issues that are top of your agenda for your members?
Olson: Our core members are small to medium sized independent mortgage banks. We run the gamut from the small correspondent lenders that are taking their loans to the big aggregators to larger firms that are getting their seller/servicer ticket in conventionals or maybe even becoming a Ginnie Mae issuer and building a servicing portfolio. Individual things or policy changes affect each part of the secondary market in a different way. We don’t represent the larger issuers. FHFA and Ginnie Mae just came out with new financial requirements. We’ve been saying for some time that there needs to be a distinction between the small and large IMBs.
The IRA: Well, especially if both agencies and especially Ginnie Mae are going to pretend that IMBs are federally insured banks. No matter how many times we explain to Ginnie Mae, for example, why the concept of risk based capital is a complete non-sequitur for nonbank finance companies, they continue to mimic the Federal Reserve and OCC supervision functions rather than develop a truly relevant risk framework. But we must remember that this is Washington. How do we get the approach you want for smaller issuers, one that recognizes that the large aggregators and the banks have the risk?
Olson: There has been an extensive amount of public comment and research that suggests that virtually all of the risk in the market is with the top-20 issuers. If one of our members that is a Ginnie Mae issuer goes out of business, we will be saddened to see that, but it will have no impact on the market for government loans.
The IRA: Precisely. The public record for the past half century suggests that insolvencies of IMBs are resolved in the normal course, often without even a bankruptcy filing. This is not a surprise because even when a bank fails, the FDIC takes over the depository and the parent company is usually liquidated informally, without a bankruptcy. Yet somehow the FHFA and Ginnie Mae, and also the Financial Stability Oversight Counsel (FSOC), see some colossal systemic risk arising from residential mortgage servicing. Given your experience on financial policy, how do you explain the strange obsession that FHFA and Ginnie Mae have with bank regulatory models?
Olson: CHLA did a paper on Ginnie Mae a few years ago and it is difficult to see the risk. Ginnie Mae made money in 2008. They make money every year. They are basically reinsuring government insured loans, so there is essentially no risk. We have hammered away at the idea that having a broad range of Ginnie Mae issuers, large and small, has been a huge benefit to the Federal Housing Administration program as well as the Veterans Administration and US Department of Agriculture. Yet the policies coming from the leadership at Ginnie Mae could end up forcing out some smaller issuers and concentrate the market more on two dozen or so large aggregators and servicers. We don’t think such a strategy actually protects Ginnie Mae or the taxpayer. We are the only trade association in DC making the argument on behalf of smaller issuers.
The IRA: Wells Fargo (WFC) is exiting government lending and servicing. At some point the leadership of Ginnie Mae and HUD perhaps need to admit that they are doing something wrong. Markets require diversity to function. CHLA is fighting for smaller issuers, but the other trades are conflicted on FHA and Ginnie Mae. The larger banks basically see smaller banks, IMBs and other financial institutions as commercial customers and the GSEs and large Buy Side funds like PIMCO and Black Rock (BLK) as the real competition. Large banks are government sponsored enterprises after all, as you know very well from working on these issues on Capitol Hill. The government loan market was designed with the assumption of liquidity support from commercial banks, which have now left the market. How do you get fairness for your smaller nonbank members when the deck is stacked with policy options that are really only appropriate for large depositories?
Olson: It is a battle. Take an example. The FHFA wants to impose a liquidity reserve on smaller issuers that don’t retain any servicing. Originally they wanted to add a 2% surcharge on TBA hedging, now it is 50bp. This doesn’t make sense to us.
The IRA: We have raised the increased margin issue with the FHFA. They do not seem able to discuss their approach, whether the tax will be imposed on net or gross exposures, or even what exposures are covered. At Ginnie Mae, likewise, we cannot find anyone who can discuss the details of the Risk Based Capital (RBC) requirements included in the joint-proposal. Small wonder that commercial banks have left the government market. Now Ginnie Mae seems bound and determined to drive the IMBs out of government lending as well.
Olson: One of big revelations I had after leaving the House Financial Services Committee was realizing after six months of talking to smaller lenders that there was much I didn’t know about mortgage finance. I had worked in residential and commercial finance early in my career, but going to head CHLA was a baptism in the reality our members face every day. The latest issuer/seller-servicer proposals present a challenge for federal policy makers in communicating the details to our members. Take another example: indemnification. Our members must be prepared to repurchase delinquent loans, but when I worked on Capitol Hill, I did not know mortgage lenders had that liability. We thought Uncle Sam covered everything, but that is not how it works for Ginnie Mae issuers.
The IRA: Ginnie Mae servicers can lose thousands of dollars on an FHA loan foreclosure. There is little risk to Ginnie Mae in terms of payments to bond holders. The custodian banks make the payments directly to the bond administrator, which is another bank, thus no counterparty risk. The real world risk to Ginnie Mae is operational and financial risk from default servicing. Why? Because GNMA provides no liquidity to the market. Policy makers tend to see risks that don’t really exist, but miss other risks that are hiding in plain sight. Remember in 2009, people were talking about Ginnie Mae being “the next shoe to drop,” but it never happened, as you’ve noted. But we digress. Talk about some of the priorities for CHLA in the coming year.
Olson: First and foremost, if we are going into a market correction in residential mortgages, then it is incumbent on FHFA and Ginnie Mae not to overreact. Increasing capital and liquidity requirements for conventional and government issuers now may just end up being a countercyclical drag on the economy and the housing market. We’ve been pushing back against changes in the issuer rules that we don’t think make sense in the real world and have also been pushing for a cut in the FHA insurance premium.
The IRA: The FHA should have cut the premium for low income home buyers years ago, but somehow the Biden Administration could not put a $3 billion earmark in the budget last year or this year? Really? FHFA should have reduced the 2008-era loan level pricing adjustments (LLPAs) by the GSEs on low-income buyers, but that did not happen either, somehow. What other issues are top of mind as we head into the end of 2022?
Olson: This is a time when the mortgage industry needs a thoughtful, sensitive approach from regulators, not some capital plan borrowed from bank regulators with no implementation framework for the industry to follow. We should remember what happened with the S&Ls in the 1990s when I was working in private real estate. By placing limitations on new loans, the regulators made the problem worse and ultimately pushed up the cost of resolution. We told banks and S&Ls not to make any more construction loans or mortgage loans, and we made the losses worse and caused more banks to fail. If we’re seeing difficult times, we need to be careful with initiatives to regulate risk because these measure will hurt access to credit among the most vulnerable people in our society.
The IRA: FHFA Director Sandra Thompson worked at the Resolution Trust Corporation in that period if we're not mistaken. But we should all remember that regulation is a coercive progressive tool that by definition is countercyclical. Regulation is about government imposing constraints and authoritarian controls on private markets. We have to somehow fight back so that our constituents can stay in business. Thank you Scott.
