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S. HRG. 113–80 

CREATING A HOUSING FINANCE SYSTEM BUILT 

TO LAST: ENSURING ACCESS FOR COMMUNITY 

INSTITUTIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING COMMUNITY BANKS AND CREDIT UNIONS IN THE CURRENT HOUSING MARKET, INCLUDING THE KEY CHALLENGES AND 

OPPORTUNITIES FACING THESE INSTITUTIONS SEEKING ACCESS TO 

THE SECONDARY MARKET 

JULY 23, 2013 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

JON TESTER, Montana, Chairman 

MIKE JOHANNS, Nebraska, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

BOB CORKER, Tennessee 

RICHARD C. SHELBY, Alabama 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TOM COBURN, Oklahoma 

KARA STEIN, Subcommittee Staff Director 

BRIAN WERSTLER, Republican Subcommittee Staff Director 

ALISON O’DONNELL, Economic Adviser 

(II)

C O N T E N T S 

TUESDAY, JULY 23, 2013 

Page 

Opening statement of Chairman Tester ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Johanns ............................................................................................... 2 

WITNESSES 

Sandra Thompson, Deputy Director, Division of Housing Mission and Goals, 

Federal Housing Finance Agency ....................................................................... 4 

Prepared statement .......................................................................................... 35 

Jack A. Hartings, President and Chief Executive Officer, The Peoples Bank 

Company, Coldwater, Ohio, on behalf of the Independent Community Bankers of America ....................................................................................................... 16 

Prepared statement .......................................................................................... 38 

Bill Hampel, Senior Vice President and Chief Economist, Credit Union National Associationn ............................................................................................... 18 

Prepared statement .......................................................................................... 41 

Andrew J. Jetter, President and Chief Executive Officer, Federal Home Loan 

Bank of Topeka, on behalf of the Council of Federal Home Loan Banks ........ 20 

Prepared statement .......................................................................................... 46 

Michael Middleton, Chairman and Chief Executive Officer, Community Bank 

of Tri-County, Waldorf, Maryland, on behalf of the American 

Bankers Association ............................................................................................. 22 

Prepared statement .......................................................................................... 57 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by the Community Home Lenders Association ................. 63 

Statement submitted by the Mortgage Bankers Association ............................... 65 

Letter submitted by Chairman Tester from B. Dan Berger, Executive Vice 

President, Government Affairs, NAFCU ............................................................ 69 

Letter submitted by Chairman Tester from Douglas M. Bibby, President, 

National Multi Housing Council; and Douglas S. Culkin, CAE, President, 

National Apartment Association ......................................................................... 72 

(III)

(1) 

CREATING A HOUSING FINANCE SYSTEM 

BUILT TO LAST: ENSURING ACCESS FOR 

COMMUNITY INSTITUTIONS 

TUESDAY, JULY 23, 2013 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 3 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Jon Tester, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN JON TESTER 

Chairman TESTER. I call to order this hearing of the Securities, 

Insurance, and Investment Subcommittee titled ‘‘Creating a Housing Finance System Built to Last: Ensuring Access for Community 

Institutions’’. I look forward to hearing from our witnesses this 

afternoon about the important role of community-based institutions 

in the housing market as well as challenges and opportunities facing these institutions as they access the secondary market. 

They will also discuss the relationships between community institutions and Fannie Mae and Freddie Mac and the Federal Home 

Loan Banks. 

The witnesses on our second panel will highlight the elements of 

the current system of housing finance that are most critical in ensuring equal access to the secondary market for community-based 

institutions, including the role of the Government backstop. 

I want to start by saying how pleased I am that we are finally 

at a point where we are having a real, honest discussion about 

what the future of housing finance should look like. From my conversations with the folks on the Banking Committee, there is consensus that the status quo is not acceptable and that now is the 

time to act to create a housing finance system built to last and to 

withstand the next crisis. 

Now is the time for us to get to work in addressing the unfinished businesses following the financial crisis, and if done correctly, 

this could be a major driver to our recovering economy. 

I am glad that we are getting into more specifics about what the 

future housing finance system should look like. In May, this Subcommittee examined how to best bring private capital back to mortgage markets while limiting taxpayer risk and facilitating a stable 

and liquid mortgage market. 

2 

Today we are exploring an issue that is very near and dear to 

my heart as well as that of Senator Johanns: how to best ensure 

that community-based institutions have access to the secondary 

market. 

As we both know, community-based institutions play a critical 

role in our housing market, providing a lifeline of credit for many 

American homeowners, particularly those in rural America. These 

institutions do an excellent job of knowing and serving their customers with their unique brand of relationship-based lending. And 

when it comes to mortgage lending, these institutions have always 

underwritten quality mortgages without exotic features and have 

been willing to serve their communities, some that would not be 

served if not for these institutions. 

So as we look to the future and we consider what our system of 

housing finance looks like, we must ensure that these institutions 

can continue to access the secondary market and that these institutions are not crowded out of the market or forced to access it 

through their larger competitors. The last thing that I want to see 

is any further consolidation in mortgage markets. 

Our housing finance system must also allow these institutions to 

securitize the mortgages that they underwrite, manage related 

risk, and meet the needs and desires of their customers. It must 

do this while preserving the 30-year fixed-rate mortgage in a way 

that small financial institutions can continue to offer this critical 

product. 

The stakes are high, and the consequences of community-based 

institutions being pushed out of the mortgage market would be 

devastating, particularly for rural America. That simply is not an 

option, so I am pleased that we have some great witnesses here 

today that will help us drill down in the role of community-based 

institutions in the housing market, that will help shed some light 

on the key issues that we should be focusing on as we consider the 

future of housing finance reform. I have worked with many of these 

folks in drafting legislation along with Senators Johanns, Corker, 

Warner, and other Members of the Subcommittee that both restructures the housing finance system and retains important protections in ensuring access to the secondary market for communitybased institutions. 

Our legislation creates a mutual exclusively for small originators 

to enable them to enjoy the economies of scale of their bigger competitors and enables the Federal Home Loan Banks to help their 

members securitize mortgages. These are critical provisions that 

will help small financial institutions remain a part of the game 

when it comes to providing choice and competition in the mortgage 

origination marketplace. 

I look forward to working with the Chair of the full Banking 

Committee and all of my colleagues in developing legislation that 

provides equal access to the secondary market for community-based 

institutions, and with that I will now turn it over to Senator 

Johanns for his opening statement. 

STATEMENT OF SENATOR MIKE JOHANNS 

Senator JOHANNS. Chairman Tester, let me just start out and say 

thank you for calling this important hearing today and for the 

3 

great work that you and your staff have put into making this hearing possible. I also want to say thank you to all the witnesses that 

are here today. 

Let me, if I might, also offer a special word of thanks to Senators 

Corker and Warner for really jump-starting this Senate debate on 

the critically important topic of reforming a system that I regard 

as unsustainable. 

As we all know, a group of eight Senators on this Committee, 

four of them from either side of the aisle, recently introduced a bill 

to responsibly transition out of the Fannie/Freddie model and into 

a model where private investors stand in front of the taxpayers but 

liquidity and affordability are preserved. 

The pieces of that bill in which Senator Tester and I took the 

most interest were the provisions included to ensure small and medium-sized lenders have equal and fair access to the secondary 

mortgage market. 

In every small town across Nebraska, a community bank or credit union truly is the lifeblood of that local economy. It is essential 

that these institutions can offer their customers fixed-rate mortgages at affordable prices. While many small institutions do, in 

fact, originate loans and hold them on their balance sheet, today’s 

volatile interest rate environment can make that a risky proposition. Access to the secondary market is a necessary tool to mitigate that risk, and we have to figure out a way to maintain it. 

To that end, I look forward to hearing from our witnesses about 

what exactly community-based lender need to see in a reformed 

housing finance system to ensure it is fair and workable for them. 

Finally, I hope today we can begin the discussion here in the 

Banking Committee about the bipartisan Senate bill, what folks 

like and, quite honestly, what they do not, and how it can help the 

types of lenders found across Nebraska and Montana and other 

States compete and thrive in the future. 

With that, let me again say, Mr. Chairman, thank you for calling 

this hearing. I look forward to hearing the witnesses. 

Chairman TESTER. Thank you, Senator Johanns. 

Would anybody else like to open with a statement? 

[No response.] 

Chairman TESTER. OK. I would like to welcome our first panel, 

a panel of one. Thank you for being here and for your willingness 

to testify today. 

Ms. Sandra Thompson serves as the Deputy Director of the Division of Housing Mission and Goals at the Federal Housing Finance 

Agency. She oversees the FHFA’s housing and regulatory policies, 

financial analysis, and policy research. Before joining the FHFA in 

March, Sandra spent 23 years with the FDIC, where she held various leadership positions, including Director of the Division of Risk 

Management Supervision. She has a wealth of experience and is a 

strong advocate for community-based institutions. 

I want to welcome you, Ms. Thompson, and you will have 5 minutes for your oral statement, but please know that you complete 

written statement will be a part of the record. Please proceed. 

4 

STATEMENT OF SANDRA THOMPSON, DEPUTY DIRECTOR, DIVISION OF HOUSING MISSION AND GOALS, FEDERAL HOUSING FINANCE AGENCY 

Ms. THOMPSON. Chairman Tester, Ranking Member Johanns, 

and Members of the Committee, thank you for the opportunity to 

discuss the important role that community-based institutions play 

in the Nation’s housing finance system. 

I am the Deputy Director for Housing Mission and Goals for the 

Federal Housing Finance Agency. We regulate Fannie Mae, 

Freddie Mac, and the 12 Federal Home Loan Banks, which, combined, support over $5 trillion in mortgages. 

For the past 5 years, we have also served as conservator for 

Fannie Mae and Freddie Mac. We take this responsibility very seriously and work hard to ensure that the enterprises operate in a 

safe and sound manner. 

Before joining FHFA in March of this year, I spent 23 years with 

the FDIC, where I most recently served as the Director of Risk 

Management Supervision. At the FDIC, I spent a lot of time participating in outreach efforts that were specifically targeted to understanding the vital role that community banks play. 

In a similar manner, FHFA is committed to undertaking outreach efforts with small and rural lenders to help better understand their access to and interaction with the secondary mortgage 

markets. 

Despite the fact that community-based lenders account for a very 

small percent of the residential mortgage market, they do play a 

vital role in serving rural and underserved communities. They are 

a stabilizing force in their local markets and generally engage in 

responsible lending. Community-based lenders have a long history 

of making sound mortgage loans and for the most part did not 

originate the abusive and predatory loans that contributed to the 

financial crisis. More important, these lenders are committed to the 

people and places where they lend money. 

Community institutions are particularly important in smaller 

and rural areas where many loans have nonstandard characteristics. For example, self-employed and seasonally employed borrowers often do not have the income documentation required to sell 

to large lenders. So the community lender often keeps these loans 

in their portfolio. But many community lenders can only make 

loans if they can sell them in the secondary market. The private 

label securitizers and correspondent banks have virtually abandoned the business. 

Community lenders’ primary access to the secondary market is 

through Fannie Mae, Freddie Mac, Ginnie Mae, and the Home 

Loan Banks. FHFA has taken steps to ensure that communitybased lenders have equal access to the secondary market. Last fall, 

we increased guarantee fees for MBS swap transactions relative to 

cash window transactions. Now, this is important because large 

lenders primarily use the swap execution, and many small lenders 

use the cash window to sell loans. The increase in guarantee fees 

leveled the playing field between large and small lenders. 

FHFA has also made the enterprises’ development of the Common Securitization Platform a key component in building a new infrastructure for the secondary mortgage market. This framework 

5 

will connect capital markets investors to homeowners and is being 

developed with the potential to be used by all issuers, large and 

small, Government and private sector. My written testimony goes 

into detail and covers three main points: one, that communitybased institutions play an important role in providing housing 

credit; two, that the FHFA has taken meaningful steps to ensure 

that community-based lenders have equal access to the secondary 

market; and, three, that community-based institutions must have 

the ability to fully participate in any future housing finance system. There should not be a significant difference in how large and 

small lenders are treated when securitizing residential mortgage 

loans. We stand ready to work with this Committee to see this goal 

reached. 

Thank you, and I am pleased to answer any questions you might 

have. 

Chairman TESTER. Well, thank you, Ms. Thompson, for your testimony. 

I am going to go a little bit out of the order that we normally 

do because I know Senator Kirk has a commitment. Senator Kirk, 

you have the floor. 

Senator KIRK. I would just say, Mr. Chairman, thank you very 

much for doing this hearing. I would say under the current old system we can safely say that housing finance was not broken, it was 

fixed. I am sure the Senator from Massachusetts can back me up 

on the future bank that we will someday found together—— 

Senator WARREN. That is right. That is our bank. 

Senator KIRK. ——based on the HSBC model that we have 

talked about so many times. 

Chairman TESTER. Thank you, Senator Kirk. 

I think we will put 5 minutes on the clock and go down the road 

here. 

Ms. Thompson, you have a unique perspective in your current 

role given your experience with the FDIC and your understanding 

of community-based institutions. It is critically important that 

these institutions remain in the business of mortgage lending, because I know that without them many areas of my State absolutely 

will not be served, as your testimony indicated. 

Your testimony highlighted your work to encourage Fannie to— 

or Freddie to back away from the proposed low activity fee. But 

looking to the future, how do we ensure that the standards, requirements, and pricing for small institutions seeking access to the 

enterprises are risk based and are not cost prohibitive or have the 

effect of pushing small institutions out of the marketplace. 

Ms. THOMPSON. Thank you, Senator. I totally agree. I think the 

important thing for us to do is to look at the characteristics of the 

loan and take that into consideration as opposed to having a volume based or dollar cutoff. When you have a dollar cutoff for eligibility, that automatically implies that bigger is better, and we 

know that that is not true. It also implies that larger is less risky, 

so any risk-based characteristics we can incorporate into how we 

define eligibility are critical as we move forward. 

Chairman TESTER. OK. So what will you do to ensure that? 

Ms. THOMPSON. Well, certainly with regard to our role as supervisor and regulator of the enterprises, ensuring that they have poliVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
6 

cies in place to evaluate potential counterparties based on a riskbased assessment as opposed to a hard-dollar threshold, because, 

again, when you have such a blunt number cutoff, it just makes it 

very difficult for smaller and perhaps less risky institutions to participate in the seller servicer model. And, again, I do believe that 

size is good, but bigger does not necessarily mean better. 

Chairman TESTER. OK. In your testimony, you noted that the 

cash window volume at Fannie tripled from 2007 to 2012 and doubled at Freddie over the same time period. What is the reason for 

this? 

Ms. THOMPSON. Well, actually I went back and looked at the flow 

for both MBS swap transactions and cash window transactions before the crisis and currently. And it was interesting because, before 

the crisis, the volume was almost—it was de minimis on a good 

day. But I think that there is an openness and receptivity to the 

entrance of small market participants, and that has been evidenced 

at both Fannie and Freddie as more and more people get back into 

the market. As the market recovers and as housing prices increase, 

I think there are more opportunities for persons to engage in the 

seller servicing business with Fannie and Freddie. 

And as my testimony indicates, for smaller lenders, they have to 

go to the cash window because many of them do not have the volume to sell and issue mortgage-backed securities. So they have to 

sell one loan at a time, so it really makes a difference to have this 

mechanism available. And I would encourage that, in any future 

housing finance system, small lenders be able to sell either multiple or single loans to whatever entity is created. 

Chairman TESTER. OK. Drawing on your experience at the FDIC 

in risk management, how important is access to Fannie and 

Freddie for community-based institutions when it comes to providing their customers with a 30-year fixed-rate mortgage? 

Ms. THOMPSON. Well, I think, again, there are two different discussions to be had on that topic. Based on my experience at the 

FDIC, it is hard for institutions to do the asset/liability management with a longer-term product. But for affordability’s sake, many 

people opt to have that product so that they can have an affordable 

mortgage product. 

But I think I do not necessarily have a view on products. What 

I do care about, as a former bank regulator, is making sure that 

borrowers have the ability to repay mortgages and that they understand the loans that they get and that they are sustainable over 

time. And I think sound lending, which is certainly the hallmark 

of community banks, especially in the residential mortgage space, 

is as good as it gets. 

Chairman TESTER. One of us will take this up with the next 

panel, but from your perspective, would the institutions that we 

are talking about, the community-based institutions, be able to provide a 30-year fixed-rate mortgage if there was not the Government 

backstop? 

Ms. THOMPSON. Well, again, I think many community banks 

have to sell their mortgages under any circumstance so that they 

can have liquidity to originate more mortgages. Again, I am just 

not in a position to opine on products. 

Chairman TESTER. OK. Senator Johanns. 

7 

Senator JOHANNS. Thank you, Mr. Chairman. 

It strikes me that the secondary market is not only an important 

financing avenue but also a vital risk mitigation tool for institutions of all sizes. It shifts both credit and interest rate risk to investors willing to take that on. 

If Congress reforms the system in such a manner that community-based institutions do not have a workable access, what sort of 

risks would be posed to those institutions? What happens in that 

kind of system? Do you have higher mortgage rates? Do you have 

less access to credit? Would you expect both to occur? Fill in the 

blanks there, if you would. 

Ms. THOMPSON. Senator, I think the words you used were ‘‘workable access,’’ and I think having access to the secondary market is 

critical, again, for community lenders, and whether they have it directly or through an aggregation process, the ability to originate 

and some absolutely have to sell. So I would think that in whatever 

future state would being developed by the Congress, that they 

would take those matters into consideration as we move forward, 

because, again, the secondary market is just absolutely critical, and 

access to that market is critical for the community lenders. 

Senator JOHANNS. Chairman Tester has referenced this, and I 

think it is a very valid point that maybe you can offer some more 

testimony on, and that is, if we do not get this right and your community banks, your community lenders are not a part of the future 

going forward, then access to those services disappears in parts of 

our State. I mean, literally it is gone. Is that a correct observation? 

Ms. THOMPSON. I think that is accurate. When you look at the 

banking system, I know there are almost 7,000 insured depository 

institutions, and of those 7,000, there are 117, give or take a few, 

that have assets over $10 billion. By number, community banks, 

and most of them, about 4,200, have assets of $250 million or less. 

So throughout the country by number, community banks are important. Dollar size and asset size, of course, the reverse is true. 

So 10 percent of the institutions hold 90 percent of the assets. But 

I do not think that the larger institutions particularly have an interest in this space that the community banks serve. And based on 

the experience I had at FHFA now and prior to that at FDIC, community banks are more than just a bank. Community institutions 

are a big part of those communities, and but for them—they do 

more than lending. They provide lots of services to the communities 

they serve. And many of them do not serve just one community. 

They serve multiple, and sometimes across State. 

So I would hope that whatever policies the Congress decides to 

come up with, I think that certainly access for rural and community institutions is critical. It is in the public interest. 

Senator JOHANNS. In your testimony you made mention of 

FHFA’s work to encourage consistent customer access as well as to 

work to discourage Freddie Mac from imposing a so-called low-activity fee. To what extent should we ensure that equal pricing 

across lenders of all sizes such as the prohibition on volume discounts, like we have in our Senate proposal? It seems to me that 

Wells Fargo should get the same price for selling a qualified mortgage to the guarantor as First National of Omaha. That is what it 

8 

seems to me should be the case. Are there positives and negatives 

to the approach we are taking? 

Ms. THOMPSON. Well, I think that certainly transparency is important, and fair pricing certainly ought to be a standard, and 

there ought not be benefits versus one over the other. But I would 

say that a risk-based approach that looks to the characteristics of 

the loan is probably fair for all lenders, because if you look at, let 

us say, LTV, FICO, DTI, and there are no disparities, you can price 

based on risk. And I think a risk-based approach versus, again, a 

blunt dollar amount or a volume really is more appropriate. 

Senator JOHANNS. OK. Thank you, Mr. Chairman. 

Chairman TESTER. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. You know, I have 

been looking forward to this hearing because I think there are two 

principles at stake here. The first is we need housing finance reform. It has been 5 years since the crash and long past the time 

we need to make these reforms. But the second is we need to do 

it right. We are only likely to get one bite at this apple, and doing 

it right here means making sure that our small financial institutions, our community banks, our credit unions, still can thrive and 

be in an atmosphere where they can do that. 

So I am very grateful to you for having the hearing here today, 

and what I would like to ask about follows up on what Senator 

Johanns had started with just a minute ago, and that is, as I understand it, Fannie and Freddie buy loans from lenders, pursuant 

to the terms of the individual contracts, as you identified. But depending on the lender and the transaction, the contracts can either 

be one-off or they can be master agreements that cover a lot of 

loans. And Fannie and Freddie currently keep the prices in terms 

of these individual agreements secret, but we do know from their 

past disclosures that the agreements tend to favor the largest financial institutions. 

So what this means, in other words, is that Fannie and Freddie 

have charged our community banks and our credit unions more 

than they have charged the big banks for what might otherwise be 

exactly the same product. 

So I think that transparency is powerfully important in any 

housing finance reform, but I am curious about how FHFA could 

make immediate improvements by requiring Fannie and Freddie to 

disclose all of their agreements with the individual lenders—that 

is, past, present, and future. 

So do you have any thoughts on Fannie and Freddie’s basis for 

not making the terms public and whether the FHFA should require 

Fannie and Freddie to disclose this information publicly? 

Ms. THOMPSON. Well, Senator, I had not thought about the 

agreements per se. I was looking at pricing, and we did take a look 

at G-fees last year, and when we report to Congress annually, we 

do an annual G-fee report. One of the things that we do is we 

break the lenders or sellers to Fannie into three different categories: 1 to 5, 6 to 100, and 100 and below. And the larger ones 

are in the 1 to 5 category, and the smaller ones are in the latter 

category of 100 and below. And one of the steps—— 

Senator WARREN. And 100 and below referring to? 

9 

Ms. THOMPSON. 100 and—the top five lenders in terms of volume. 

Senator WARREN. That is right, total volume that the lender 

does. 

Ms. THOMPSON. Total volume of the lender. And so one of the 

things that we did last year in September when we increased Gfees was we, again—and I mentioned this in the testimony—we did 

raise the G-fees for the swap, the larger transactions relative to 

those participants in the smaller transactions. So when you look at 

the smaller, which is the 100 and below, and then the larger, when 

we raised the G-fees, there certainly is now an equal playing field. 

And I think the principles ought to apply. 

One of the things that we are working on is trying to provide 

some uniform data standards, because right now there is a standard for Fannie, there is a standard for Freddie. And to the extent 

that we have a single data standard that we can have uniform reporting, uniform disclosures, those are the things that help drive 

the price down, when there is one set of standards that everyone 

knows, that people are aware of, it just makes it clear for all mortgage participants to work toward that end. 

Senator WARREN. So, Ms. Thompson, I completely agree with you 

about the importance of standardized reporting so that you can 

make comparisons so the markets become transparent and we can 

tell. And I want to ask you a question about that in just a second, 

but I want to make sure I have kind of dug in on this question 

about what Fannie and Freddie do now. 

I appreciate the point you make about changing the fees, but as 

I understand it, Fannie and Freddie still do not disclose what they 

are charging. And so my question is whether or not this is something FHFA could think about. As we heard toward reform, you 

know, it is like a lot of things. You kind of smooth it in if you start 

making changes now, and Fannie and Freddie were required by 

FHFA to make full disclosure of how they have priced in the past, 

how they are pricing now, how they continue to price in the future, 

whether or not that might be a helpful way both to understand 

how this market operates now and to make certain going forward 

that this market is a level playing field for our community banks 

and credit unions. 

Ms. THOMPSON. I think we could take that into consideration. 

Senator WARREN. That would be enormously helpful. Thank you. 

And we will get back someday to the question about how to make 

sure that we get uniform reporting, but count me as a big supporter on this, and we will have a good conversation about data 

tagging and keeping the information going forward. Thank you, 

Ms. Thompson. 

Chairman TESTER. Senator, we may well have a second round. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I want to thank you 

and the Ranking Member for your interest not only in GSE reform 

but also in particular paying a lot of attention to how to fix the 

smaller institutions. And I know in your two States in particular, 

but all of ours, it is a very important issue, so thank you. 

I will make note that of the eight people who have been here on 

the dais, seven of the eight have actually supported and introduced 

10 

and affected in big ways a bill that would transition us, to use Senator Warren’s—you know, as things are smoothed out, transition us 

into a better place. And I want to thank everybody who has been 

involved in that effort. 

I do want to point out that one of the attributes of 

preconservatorship, going back to, again, more questions that Senator Warren asked, Fannie and Freddie were giving volume discounts, and so the big guys were getting bigger and the small guys 

that many of us represent were at a disadvantage. Would you 

agree that if there is going to be an explicit guarantee—and there 

is today. You know, because of what has happened, there is, in fact, 

an explicit guarantee. But going forward, would you agree that if 

there is a Government explicit guarantee that everybody ought to 

be charged the same price for that guarantee? 

Ms. THOMPSON. I absolutely think that that is something that I 

would have to take back to my agency to consider. It sounds perfectly reasonable, and, again, there are so many complexities, it is 

just hard to give you a good answer. 

Senator CORKER. Well, the bill that many of us have worked on 

does that. Let me ask you this question: In the event there was not 

a Government backstop of some kind—and I think, you know, most 

people on this Committee have come to the conclusion that some 

type of backstop is a reasonable place to be. But without a backstop, what would happen with the smaller institutions as far as 

wouldn’t the larger institutions more and more dominate the market if there were not some kind of Government backstop? 

Ms. THOMPSON. It is likely that if the—the smaller institutions 

would have to pay more because they would have to go through an 

intermediary, an aggregator to get direct access to selling their 

loans. But it is just hard to say what would happen with or without 

a Government backstop. 

Senator CORKER. But it would make sense, I think, if you did not 

have that element of reinsurance, that over time the larger entities 

would have the ability to deal with the secondary market in a way 

that the smaller institutions would not. Is that correct? 

Ms. THOMPSON. Correct, Senator. 

Senator CORKER. I love leading you as a witness. I appreciate 

that. 

[Laughter.] 

Senator CORKER. Let me ask you another question in a nonleading way. Do you agree that having a situation where there is 

a Government backstop implied but that you have CEOs of entities 

that really are not focused on that particular aspect, which has to 

do with the taxpayers, but instead is focused on shareholders, that 

that is an untenable place for us as a Nation to be? 

Ms. THOMPSON. Senator Corker, that is way above my pay grade, 

and I would defer to not answer that. 

Senator CORKER. OK. Well, as an editorial comment, I will say 

then that I think what—actually, I think what most people on this 

Committee have come to the conclusion of, that model of having 

private shareholder gain and taxpayer losses where, in essence, the 

shareholders’ interests are well served in good times but the 

public’s interests are not well served during bad times is a model 

that we need to move beyond. There may be differing ways of getVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
11 

ting there, but I think just in looking at the body language, I think 

most people think that is not a good place to be. And it looks like 

you might want to answer now. 

Ms. THOMPSON. Well, Senator, I did want to highlight that we 

are engaged in some credit risk-sharing transactions, and one of 

the things that Director DeMarco has done is establish a scorecard 

for the enterprises. And part of that scorecard, they have been 

asked to participate in multiple types of credit risk-sharing transactions so that we can bring private sector money back into the 

securitization market. And I do think that risk sharing is important, and I did want to raise that to your attention. 

Senator CORKER. And I think that, you know, as I mentioned, 

seven of the eight people who have been here today, and hopefully 

more, really believe that it is important to have that risk sharing 

up front. And I want to thank you and actual the FHFA for leading—giving us a bread trail, if you will, toward that end. I know 

that you all are building toward an end where there is that private 

sector risk, which a bill that many of us have worked on together 

takes us to, and we thank you because we really believe we are 

working in the same direction and think that is very productive 

and helps create this smoothing effect that Senator Warren just 

talked about. 

Ms. THOMPSON. Senator, we did want to take the opportunity to 

thank you for introducing the legislation. We are just glad that the 

policy makers have moved forward and introduced legislation. So 

we just wanted to say thank you. 

Senator CORKER. Thank you very much. 

Chairman TESTER. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I appreciate that 

you and the Ranking Member both support this new legislation, 

holding this hearing. I would have preferred the opportunity to go 

in front of my friend Senator Corker since he asked all the questions I had, but I will find a way to—— 

[Laughter.] 

Senator WARNER. ——come back around to them in a different 

way. 

Chairman TESTER. Senator Heitkamp has some different questions if you would like me to move. 

[Laughter.] 

Senator WARNER. And I know I may be just going back over 

ground that has already been tilled, but I just cannot imagine— 

there is another proposal being put forward in the House that 

would remove any Government backstop, that would take out any 

private sector role, and I just do not see—can you envision a system in which that takes place? And, Senator Johanns, First Mutual 

of Omaha, what was your institution you—— 

Senator JOHANNS. First National. 

Senator WARNER. How would First National in Omaha in that 

system ever be able to compete with Wells Fargo or JPMorgan? 

Can you envision a system where they would be on an equal footing, Wells Fargo and JPMorgan? 

Ms. THOMPSON. Senator, I am envisioning the Congress working 

to enact legislation that I am happy to implement, and—— 

12 

Senator WARREN. No, but you are an expert in the field. I would 

just think that you would have to have some sense whether, you 

know, First National of Omaha is ever going to have in a private 

sector-only system the ability to have equal access to a secondary 

market that a loan that was originated out of Wells or JPMorgan— 

I do not mean to be—just you have got a lot of experience. Is there 

a way to get there with that possibility? 

Ms. THOMPSON. It is difficult to imagine. I have never worked in 

an environment where there was not that. But, again, I am just not 

certain, and I think that making sure that the Omaha or Nebraska 

institution has access to the secondary market, however they can, 

is done in a fair, transparent, and least costly—I would be concerned about cost, I guess, more than anything. 

Senator WARNER. Right. And I guess one of the things that—you 

know, and you were kind enough to reference the legislation that 

some of us have worked a long time on. One of the ways, just to— 

I am sure most of the folks in the audience realize this—that we 

tried to ensure that access for community-based institutions, credit 

unions, and others was, you know, to—because we wanted a more 

competitive system of issuers, was to take some of those intellectual assets and other assets that are within Fannie and Freddie 

and create a co-op that would make sure that it had as its priority 

making sure that community banks and credit unions had that fair 

access and that pricing equality. As a matter of fact, as the legislation states, we even guarantee that pricing equality. As a matter 

of fact, as the legislation states, we even guarantee that pricing 

equality. I think one of the comments you made—and I think we 

all agree with this—pricing equality based upon access to a secondary market, obviously if there are loans of different quality, 

that has to be dealt with. 

Ms. THOMPSON. That is correct, sir. 

Senator WARNER. But I do think that the approach that this 

group is taking, you know, guarantees that access because if there 

is—again, one of the lessons that we have seen from the crisis is 

that when stuff hits the fan, sometimes it is these smaller institutions that stay in the communities, that stay through good times 

and bad, and that we have seen, again, from some of the data that 

you have, a relatively dramatic increase in the market share that 

these smaller institutions have had postcrisis versus precrisis. Correct? 

Ms. THOMPSON. That is exactly correct, Senator. 

Senator WARNER. And I would argue that is, again, a good thing 

in terms of keeping the value of these institutions. 

I guess I want to just raise one other thing that Senator Warren 

raised. I agree that we need more transparency and that, again, a 

piece of this legislation that is bouncing around up here actually 

moves forward with what FHFA has been doing in terms of trying 

to create this Common Securitization Platform around reps and 

warranties, around documentation, that would allow transparency 

and really make sure this is a utility function. And I would echo, 

subject to being, you know, explained otherwise, why Senator Warren’s comments would not be kind of right on, at least in that transition, why we should not have more of that transparency sooner 

than later, although again we envision that Common Securitization 

13 

Platform being an essential utility component of this new reform 

we have. 

I do not want to lead you as well, but since you are welcoming 

this legislation, is it safe for me to infer that you do not think the 

status quo or recapitalizing Fannie and Freddie is the appropriate 

role? 

Ms. THOMPSON. Well, not to provide my personal opinion, I just 

think that housing finance needs to be reformed. I am happy to see 

legislation that moves in the right direction. Fannie and Freddie, 

again, the model was broken. And to the extent that—— 

Senator WARNER. So a long-term conservatorship for Fannie and 

Freddie is not a valid option. 

Ms. THOMPSON. Five years is a really long time for a conservatorship, and longer than that is quite unimaginable. 

Senator WARNER. Thank you, Mr. Chairman. Thank you, ma’am. 

Chairman TESTER. Senator Heller. 

Senator HELLER. Thank you, Mr. Chairman and Ranking Member. I appreciate the opportunity to crash your Subcommittee. I 

know you do not see me enough, so I thought I would stop by. But 

this is an important issue, and you and I have had an opportunity, 

Mr. Chairman, in your office to talk about banking and the problems with community banking that we have in some of our more 

rural States and our more rural areas within our States. 

I would argue that the economic downturn probably had more to 

do with housing, at least in our communities, than any other issue. 

I know gasoline prices played a big role in that also, but ultimately 

it was the crash of the housing market. 

In Nevada—and I know some of my colleagues have heard this 

before, but over 50 percent of the homes in Las Vegas today are 

underwater. We have over 400,000 homes in Nevada that have received foreclosure notices. And, you know, to make matters worse, 

we have probably lost half of our community banks in the last 5 

years, probably half of those banks—I mean, obviously making it 

very difficult for the economy to bounce back. 

We had a report last week on unemployment, and it actually 

jumped half a point in Nevada last week, although I do see and 

most people are noticing that there is some recovery that is occurring in my home State. 

So putting all those issues together, you can imagine the concern 

and the reason why I am here to have this discussion with this 

panel, because I believe the panel that is here today are, frankly, 

the individuals that are going to help solve this problem in the future. 

So my question, since you are the expert, is: Have you had an 

opportunity to take a look at the Corker-Warner bill? Do you have 

any insight or opinions on it? 

Senator WARNER. Corker-Warner-Heller bill? 

[Laughter.] 

Ms. THOMPSON. Senator, again, we are very happy that the legislation has been introduced. We have formed a working group to 

take a closer look at it, and we have not come to any determinations. But we are happy to, when we are done, provide any technical advice you would like on certain aspects of the bill. 

14 

Senator HELLER. OK. You made comments earlier in your discussions with others on the panel about the importance of the secondary market, and I agree with you 100 percent. I think there is 

a role for the secondary market. I think there is a role for Government to play in that to make sure that there is some level of certainty and liquidity out there so that these home loans can be 

made. And I think you have answered this question. We keep asking you the same question over and over again, but we are trying 

to get to the bottom of whether or not you believe that Freddie and 

Fannie need to be reformed. 

Ms. THOMPSON. I think housing finance needs to be reformed. I 

think there needs to be a level playing field for anyone who wants 

to issue, whether you are large or small. I do think it is important, 

again, for special attention to be paid to the smaller institutions because of the public interest that they serve in communities across 

this country. I just think that is critical. So whatever legislation is 

introduced and enacted, I do believe that that is a crucial part to 

the long-term recovery of our Nation. 

Senator HELLER. If after 5 years we do nothing, what would the 

consequences of that be? 

Ms. THOMPSON. It would be very—it is hard to imagine. Certainly I am hoping that that will not be the case, that whatever 

legislation the Congress agrees upon will be enacted and we will 

be well along the way of implementing housing reform legislation. 

I just hope that that is not the case. 

Senator HELLER. Do you believe that this lack of housing reform 

or as slow as we have moved here in Congress had—do you believe 

that that has slowed our economic recovery? 

Ms. THOMPSON. I believe that this is the last piece that needs to 

be addressed. Again, I worked for—spent the last 23 years at the 

FDIC and just came out of a banking crisis, and certainly housing 

was a big part of that. I just believe that once we get this done, 

we will be well along our way to a recovered Nation. 

Senator HELLER. Do you believe by not doing any reforms to 

Fannie and Freddie that we would be susceptible to another housing market crash? 

Ms. THOMPSON. Fannie and Freddie just absolutely have to be re- formed. That model was broken, and they had to borrow $185 million from the taxpayers, and it is just untenable. They are not capitalized entities, and this is a big part of our housing future, and 

we need to fix it. 

Senator HELLER. Ms. Thompson, thank you for your testimony. 

Again, Mr. Chairman, thank you for allowing me to come in and 

ask a few questions. 

Chairman TESTER. You are welcome anytime. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you so much, Mr. Chairman and 

Ranking Member. This is critically important, and I always think 

it is interesting to follow Senator Heller because North Dakota’s 

situation could not be more different from the situation in Nevada, 

where they are seeing houses underwater, excess capacity in the 

market. In North Dakota, we think we need to build about 33 percent more units by 2025. But I want to bring the subject back because, at the very heart of it, every person here who is repVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
15 

resenting a different situation is telling you that it is absolutely 

critical that we maintain a role for independent community banks 

and credit unions, and that when we are all wringing our hands 

in despair over too big to fail, we are setting policies in Washington, DC, that are consolidating more and more assets into the 

larger banks and diminishing the capacity of the smaller community banks to participate in the marketplace, and that has to end. 

Now, I know you are frustrated with all of us because we are trying to get you on board here, and we really do—— 

[Laughter.] 

Senator HEITKAMP. We really do appreciate your advice. But I 

would emphasize to you we need your leadership, and it is not 

leadership to come and not, you know, kind of say we will help you 

in any way you can. You are the experts. We represent a lot of different folks, a lot of different constituencies. We need the expertise 

that you bring and that the other panels bring. But we also need 

your leadership, and we need you to be weighing in on the important policy questions. 

And so, you know, I hope that as you explore the Corker-WarnerHeller-Tester-Heitkamp—you know, we could go on and on, but 

those are the ones who are here—bill, that as we have said many 

times, we think we have done a pretty good job, but nothing is perfect, and we need leadership from the administration. 

But I want to turn to a topic that is maybe unique and different 

in my State, and that is, appraisals. You know, I recently had an 

opportunity to get an appraisal in Washington, DC, and shock upon 

shock, it only took a week. And if I were going to do that in North 

Dakota right now, it would be 6 to 10 months—or 6 to 10 weeks. 

We cannot move forward, in part because of the impediments and 

because of the requirements. 

I also would tell you that I am from a small town of 90 people, 

grew up in a little small town of 90 people. If somebody wanted to 

sell a house, good luck finding comparable sales within a 10-mile 

radius. There is too much one-size-fits-all in the housing market, 

and that is even more discouraging, not just for the industry but 

for the homeowners as they are trying to transition out and build 

opportunities. 

Do you think that would be appropriate to take a look at areas 

like Senator Tester and Senator Heller and I represent where, you 

know, you could not see another person for miles and miles, take 

a look at those kinds of areas and look at some different standards 

as it relates to quality of mortgages? 

Ms. THOMPSON. I absolutely agree with you, Senator. In fact, a 

couple of institutions have raised the issue of appraisals that describe just exactly what you are talking about. The next home may 

be 10 miles away—— 

Senator HEITKAMP. That is typical. 

Ms. THOMPSON. ——so it is very difficult to find a comparable appraisal value. And so we have been engaging with both Fannie Mae 

and Freddie Mac about their seller servicer guide and the standards, and in particular highlighting here is the policy, but here is 

how it applies to rural and small communities, and here is how it 

applies to you. And we do believe that certainly the policies you 

make in Washington, it is not one-size-fits-all, and it is not bigger 

16 

is better. And you have to take a risk-based and specific targeted 

approach to address the issues that are relevant to the city you are 

in, the two you live in, or the issue that you are facing. And I certainly could not agree with you more about appraisals. 

Senator HEITKAMP. Thank you. 

Chairman TESTER. Well, thank you, Ms. Thompson. We appreciate you being here very, very much, and we will stay in touch. 

We will now proceed to the second panel, and while the witnesses are setting up, I am going to read a brief bio on each of 

them. 

First of all, we have Jack A. Hartings who serves as vice chairman of the Independent Community Bankers of America and is the 

president and CEO of The Peoples Bank in Coldwater, Ohio. He 

previously served as State director for ICBA and as chairman of 

ICBA’s Policy Development Committee. Mr. Hartings also serves as 

a member of the Consumer Financial Protection Bureau Community Bank Advisory Council. Welcome, Mr. Hartings. 

We have Mr. Bill Hampel, who is the senior vice president of research and chief economist for the research and policy analysis at 

the Credit Union National Association. Mr. Hampel writes economic analysis columns that appear in several credit union publications. Prior to joining CUNA, he taught economics at several universities, including the University of Montana and Iowa State University. Welcome, Mr. Hampel. 

We have Mr. Andrew Jetter, the president and CEO of the Federal Home Loan Bank of Topeka. He joined the FHLB Topeka in 

1987 as an attorney and served as general counsel and senior vice 

president through his tenure with the bank. Before joining FHLB 

Topeka, Mr. Jetter was engaged in private practice in law and 

served as a full-time instructor in the areas of finance and management at the University of Nebraska at Omaha. Welcome. 

And last, certainly not least, Michael Middleton is the chairman 

and CEO of the Community Bank of Tri-County. Mr. Middleton 

joined the bank is 1973 and was promoted to president and chief 

executive officer in 1979. He is also chairman of the Board of Directors of the Maryland Bankers Association and is former chairman 

of the Board of Directors of the Federal Home Loan Bank of Atlanta. Welcome, Mr. Middleton. 

Each of you, as with the previous panel, will have 5 minutes, and 

your entire written statement will be put in the official record. You 

can start, Mr. Hartings. 

STATEMENT OF JACK A. HARTINGS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE PEOPLES BANK COMPANY, 

COLDWATER, OHIO, ON BEHALF OF THE INDEPENDENT 

COMMUNITY BANKERS OF AMERICA 

Mr. HARTINGS. Thank you. Chairman Tester, Ranking Member 

Johanns, Members of the Subcommittee, I am Jack Hartings, president and CEO of The Peoples Bank Company and vice chairman 

of the Independent Community Bankers of America. The Peoples 

Bank Company is a $400 million asset bank in Coldwater, Ohio, 

and I am pleased to represent community bankers and ICBA’s 

nearly 5,000 members. 

17 

Any broad-based recovery of the housing market must involve 

community bank mortgage lending. Community banks represent 

approximately 20 percent of the mortgage market, but more importantly, this lending is often concentrated in the rural areas and 

small towns not effectively served by large banks. For many borrowers in these areas, a community bank loan is the only option. 

The Peoples Bank Company serves a community of approximately 5,000 people and has been in business for over 100 years. 

Our bank survived the Great Depression and numerous recessions—as have many other ICBA member banks—by practicing 

conservative, commonsense lending. 

Today I would like to talk to you about my bank’s mortgage lending and the importance of the secondary market. Mortgage lending 

is about 80 percent of my business. The Peoples Bank Company is 

the number one mortgage lender in my county, Mercer County. 

About half of the mortgage loans my banks makes are sold, mostly 

to Freddie Mac, with a smaller portion sold to the Federal Home 

Loan Bank of Cincinnati. The secondary market allows us to meet 

customers’ demands for fixed-rate mortgages without retaining the 

interest rate risk these loans carry. 

Selling into the secondary market frees up our balance sheet to 

make more residential mortgage loans as well as small business 

loans, which play a vital role in our community. 

ICBA developed a comprehensive set of secondary market reform 

principles. 

First, community banks must have equal and direct access. We 

must have the ability to sell loans individually for cash under the 

same terms and pricing available to the larger lender. 

Second, customer data cannot be used to cross-sell financial products. We must be able to preserve customers’ relationships after 

transferring the loans. 

Third, originators must have the option to retain servicing rights 

at a reasonable cost. Servicing is critical to the relationship lending 

business model vital to community banks. 

Finally, private capital must protect taxpayers. Securities issued 

by secondary market entities must be backed by private capital and 

third-party guarantors. Government catastrophic loss protection, 

which is critical during periods of market stress, must be fully 

priced into the guarantee fee and the loan level price. 

Without these principles, there could be further consolidation of 

the mortgage market, which would limit borrower choice, disadvantage communities, and put our financial system at risk of another 

collapse. 

ICBA is pleased to see the robust debate emerging on housing finance reform. Many of these ideas and proposals provide promising 

features but also warrant additional consideration and reworking. 

ICBA welcomes the deliberation of the future of housing finance 

and the important role of community banks such as mine in the 

mortgage market. ICBA is grateful to Senators Warner, Corker, 

Tester, and Johanns for introducing S.1217 and to Senators Hagan, 

Moran, Heller, and Heitkamp for their cosponsorship. 

ICBA sincerely appreciates the opportunity to provide input into 

this bill. We are encouraged by the inclusion of certain provisions 

18 

to accommodate ICBA’s concern, and I note four of those in particular: 

First, the mutual securitization company would secure access to 

the secondary market for community banks and other small originators and would allow them to sell loans for cash and to retain 

their servicing. 

Second, the Federal Home Loan Banks would also be allowed to 

issue securities, creating another access point for community 

banks. 

Third, limiting issuers to no more than 15 percent of the outstanding guaranteed securities would reduce concentration in the 

securitization market by large banks or Wall Street firms. 

Last, the FMIC guarantee, well insulated by private capital, 

would insure the securitization market continues to function even 

in times of market stress. 

We look forward to continuing to work with the other cosponsors 

and the Chairman and the Ranking Member to further strengthen 

this bill and to ensure it serves the needs of community bank customers. 

I want to thank you again for holding this hearing and for the 

opportunity to testify, and I look forward to your questions. 

Chairman TESTER. Well, thank you, Mr. Hartings, for your testimony, and just for the record—and you did not know this—but 

other than the nine you listed, we can also add Senator Manchin 

as an original cosponsor. With that, thank you for your testimony. 

Mr. Hampel, you may proceed. 

STATEMENT OF BILL HAMPEL, SENIOR VICE PRESIDENT AND 

CHIEF ECONOMIST, CREDIT UNION NATIONAL ASSOCIATION 

Mr. HAMPEL. Thank you. Chairman Tester, Ranking Member 

Johanns, Members of the Subcommittee, thank you for the opportunity to testify at today’s hearing. I am Bill Hampel, chief economist for the Credit Union National Association, which represents 

the Nation’s almost 7,000 credit unions and their 97 million members. 

CUNA appreciates the attention this Subcommittee is focusing 

on housing finance reform. Credit unions need fair and equal access to a secondary market for lenders of all sizes, one that will ensure affordable mortgage products for our members. My written 

testimony describes in detail the current state of mortgage lending 

by credit unions; the importance of the 30-year fixed-rate mortgage; 

the need for some form of Government guarantee so long as there 

are adequate taxpayer protections; and, finally, it offers some comments on S.1217. 

Credit unions have been actively engaged in mortgage lending 

since the 1970s. Our origination volumes rose sharply in the recent 

financial crisis as credit unions remained able to lend while major 

parts of the secondary market collapsed. Last year, credit unions 

originated $123 billion of first mortgage loans, representing 6.5 

percent of the market, and over 80 percent of those loans were 

fixed-rate loans. Credit unions are now significant players in residential real estate finance. 

Credit unions originate mortgage loans both for their own portfolios and for sale to the secondary market. The decision to hold or 

19 

sell a loan depends primarily on the management of interest rate 

risk as opposed to the desire to offload excessive credit risk. Interest rate risk considerations can vary through time. Up until 2008, 

credit unions sold only a third of their new loans. Since then, as 

long-term interest rates have plummeted, credit unions have found 

it prudent to sell more of their new loans so as to not repeat the 

savings and loan debacle of the 1980s. In the first quarter of this 

year, they sold almost 60 percent of their originations. 

At current low interest rates, mortgages are much more appropriately financed by investors with a long-term horizon such as life 

insurance companies and pension funds than by depository institutions. 

The fact that many loans will be held on credit unions’ books 

makes them prudent lenders. Even at the depths of the recent financial crisis, losses on credit union-held first mortgages remained 

remarkably low, peaking at less than one-half of 1 percent of loans 

outstanding. At commercial banks, similar calculated losses peaked 

at almost four times that amount, and loss rates at other lenders 

were undoubtedly even higher. 

The fact that interest rate risk management often requires selling a significant portion of loans means that a robust and accessible secondary market is vital to credit unions. 

We fully appreciate the need to reform the current system of 

housing finance. We are concerned, however, that the reform does 

not hinder the ability of credit unions to meet their members’ housing finance needs in a member-friendly, cooperative way. Because 

of this concern, we have a few principles that we feel strongly the 

new system must accommodate. 

First, there must be fair access to the secondary market for lenders of all sizes. 

Second, the entities providing secondary market services must be 

subject to rigorous regulatory and supervisory oversight to ensure 

safety and soundness and equal access. 

Third, the new system must ensure that, even in troubled economic times, mortgage loans will continue to be made available to 

qualified borrowers. 

Fourth, the new housing finance system should emphasize reasonable consumer education and counseling. 

Fifth, the new system should include consumer access to mortgage loans with predictable, affordable payments for qualified borrowers. This has traditionally been provided through the 30-year 

fixed-rate mortgage. 

Sixth, the new housing system should apply reasonable conforming loan size limits that adequately take into consideration 

variations in local real estate costs. 

Seventh, the important role of Government support for affordable 

housing should be a function separate from the responsibilities of 

the secondary market entities. The requirements for a program to 

stimulate the supply of credit to lower-income borrowers are not 

the same as those for the more general mortgage market. 

Eighth, most market participants define ‘‘servicing’’ as the process whereby monthly payments from borrowers are routed to investors and how delinquencies are handled. While credit unions understand the importance of those functions, they view loan servicing 

20 

more as an opportunity to continue to provide excellent service to 

their members after the loan has been made. Credit unions are 

also concerned about the continued confidentiality of their members’ data. Therefore, it is critical that credit unions are able to 

continue to perform servicing for their members in the future. 

And, last, the transition from the current system to any new 

housing finance system must be reasonable and orderly. 

As we continue to study S.1217, we are encouraged that it largely addresses our principles. CUNA especially appreciates the leadership of Senators Corker and Warner and the rest of the sponsors 

of the bill to ensure that credit unions and other small community 

lenders will continue to have access to the secondary market. 

Through the creation of the Mortgage Insurance Fund, the bill goes 

to great lengths to protect the taxpayer while providing a necessary 

ultimate Government backstop. 

In summary, CUNA believes that S.1217 is a positive step toward creating a sustainable and affordable housing market. Thank 

you again for allowing me to testify today on behalf of America’s 

credit unions, and I look forward to your questions. 

Chairman TESTER. Thank you, Mr. Hampel. 

Mr. Jetter. 

STATEMENT OF ANDREW J. JETTER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FEDERAL HOME LOAN BANK OF TOPEKA, ON BEHALF OF THE COUNCIL OF FEDERAL HOME 

LOAN BANKS 

Mr. JETTER. Good afternoon, Chairman Tester, Ranking Member 

Johanns, and Members of the Subcommittee. My name is Andrew 

Jetter, and I am the President and CEO of the Federal Home Loan 

Bank of Topeka. I appreciate the opportunity to speak to you today 

on behalf of the Council of Federal Home Loan Banks. 

Congress created the Federal Home Loan Banks in 1932 to support America’s housing finance system by providing liquidity to 

thrift institutions and insurance companies. Since that time, Congress has expanded the mission of the banks to include support for 

affordable housing, community development, and other forms of 

community lending, and opened membership to commercial banks, 

credit unions, and community development financial institutions. 

Although Congress has expanded our mission, our core structure 

remains unchanged: 12 independent cooperatives, each with our 

own capital, membership, boards of directors, and management. 

During the Nation’s financial crisis, the Federal Home Loan 

Banks were a critical source of funding for U.S. financial institutions. The Banks expanded their lending to members of every asset 

size and in every part of the country, with loans to members, what 

we call ‘‘advances,’’ increasing from $650 billion in 2007 to over $1 

trillion in 2008. And, importantly, the Federal Home Loan Banks 

took no taxpayer dollars. 

The Federal Home Loan Banks are financially strong and stable. 

2012 net income was $2.6 billion, and the banks ended the year 

with over $10 billion in retained earnings. Each bank is now allocating 20 percent of its net income to a special restricted retained 

earnings account. 

21 

The Council welcomes the opportunity to share our views on 

housing finance reform. We commend you for your extensive efforts 

in working to achieve a sustainable housing finance system that 

also protects the taxpayer. 

As you consider the future role of the Federal Home Loan Banks, 

you have appropriately recognized that the Federal Home Loan 

Banks are very important to community financial institutions. 

These smaller institutions often have limited options and depend 

on the products and services provided by the Federal Home Loan 

Banks. 

Community financial institutions are significant players in housing finance. Their core strength is their deep knowledge of local 

markets and their personal relationship with customers. In smaller 

communities and in rural markets, community financial institutions are often the sole source of mortgage credit. 

Community financial institutions originate a significant amount 

of mortgage loans. In the first quarter of 2013, banks and thrifts 

with less than $10 billion in assets originated $55 billion in residential mortgages. They also held on balance sheet approximately 

$500 billion in mortgage loans and $300 billion in mortgage-backed 

securities. 

Mr. Chairman, community financial institutions are dealing with 

enormous challenges and uncertainty. We are currently conducting 

a survey of our members to understand how we can better assist 

their housing finance activities. Some of the initial feedback is disturbing, as many of these institutions are questioning their ability 

to continue as housing lenders. Much of the concern relates to the 

new rules around qualified mortgages and the capital requirements 

under the new Basel III rules. While some progress has been made, 

more needs to be done. 

We are proud that the Federal Home Loan Banks have a long 

history of supporting the housing finance activities of community 

financial institutions. For portfolio lenders, we offer a variety of 

products that help them hedge the risk of a long-term fixed-rate 

mortgage portfolio. We offer long-term fixed-rate advances, advances that amortize similar to a mortgage, and advances that are 

prepayable to match the prepayment option in mortgages. We provide technical assistance to help members quantify and manage the 

interest rate risk from a portfolio of fixed-rate loans. 

We also support their secondary market needs through our mortgage programs. These programs combine the credit expertise of a 

local lender with the funding and hedging advantages of the Federal Home Loan Banks. Most of the members participating in our 

mortgage programs have less than $1 billion in assets. Many of the 

Federal Home Loan Banks offer MPF Xtra. Through MPF Xtra, 

mortgage loans are aggregated through the Banks and sold to 

Fannie Mae. This program allows small members to sell loans at 

prices competitive with larger institutions. 

We are very pleased that S.1217 recognizes the importance of 

maintaining a role for institutions of all sizes in the housing finance system of the future. We believe providing reliable access for 

small and midsized lenders to the secondary market is very important. 

22 

We appreciate that the bill provides different options for the Federal Home Loan Banks to serve their members in the future. Along 

with our members, we are open to exploring opportunities to expand our support of community lenders in housing finance. 

At the same time, we recognize the paramount importance of 

maintaining and protecting our continuing role as a reliable source 

of liquidity for our members. 

Chairman Tester, Ranking Member Johanns, thank you for the 

opportunity to appear before you today. 

Chairman TESTER. Thank you for being here, Mr. Jetter. Thank 

you for your testimony. 

Mr. Middleton. 

STATEMENT OF MICHAEL MIDDLETON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, COMMUNITY BANK OF TRI–COUNTY, 

WALDORF, MARYLAND, ON BEHALF OF THE AMERICAN 

BANKERS ASSOCIATION 

Mr. MIDDLETON. Chairman Tester, Ranking Member Johanns, 

my name is Michael Middleton. I am the chairman and CEO of the 

Community Bank of Tri-County in Waldorf, Maryland. We serve all 

of southern Maryland and the northern neck of Virginia with 11 

branches and assets just under $1 billion. I greatly appreciate the 

opportunity to represent the ABA’s views on the future of the secondary mortgage market. 

The ABA commends Senators Corker, Warner, Manchin, Tester, 

Johanns, Hagan, Heitkamp, Heller, Kirk, and Moran on sponsoring 

Senate bill 1217. We believe it prudently addresses the Federal 

Government’s role in the mortgage market and resolves the longstanding conservatorship issues of Fannie Mae and Freddie Mac. 

This bipartisan legislation is a first positive step in what is certain to be a long, long process in creating a sustainable, rational, 

and limited role for the Federal Government in supporting and regulating a healthy mortgage market. It properly realigns a significant portion of the residential mortgage process so that it is conducted by the private sector. Under the implementation, it should 

serve as a model for the other Government mortgage aggregators. 

Now, as you are fully aware, the mortgage market touches the 

lives of nearly every American, and, therefore, it is imperative that 

reform be done without inflicting further harm on the already fragile housing market and, most importantly, does not inadvertently 

harm creditworthy Americans who wish to own their home. 

The bill follows principles that have long been advocated by the 

ABA. It provides a set of incentives to strengthen Government’s involvement and to an appropriate and sustainable level, while establishing the structure for a liquid private market. 

The legislation creates the Federal Mortgage Insurance Corporation, or FMIC, which will serve as the public guarantor of eligible 

mortgages, as well as the regulator of the issuers, aggregators, and 

credit enhancers. 

This approach addresses a number of key concerns with the Government’s role in the housing finance markets. 

First, in the area of mortgage finance, the primary goal of any 

Government-sponsored enterprise is to create stability and liquidity 

23 

to the market participants. Its role is to facilitate the ability of the 

primary mortgage market to provide credit for qualified borrowers. 

Your proposed legislation achieves the goal by limiting the scope 

of the FMIC guarantees a narrow set of well underwritten loans as 

well as proper regulation of the market participants. Second, by 

limiting the FMIC’s scope, the bill creates an environment for a 

strong and healthy private market to take over the role of the 

GSEs. And by moving these activities to the private sector and ensuring private entities take the first loss position against guaranteed debt, the bill substantially reduces taxpayer liability. It better 

addresses the mandate of the Dodd-Frank Act for a lender to have 

skin in the game in a manner that is certainly much more achievable for the community banking sector. 

In order to accomplish its goal of a more limited Government role 

while ensuring that the mortgage markets continue to function 

properly, a number of outstanding issues need to be addressed. 

These include clearly refining the capitalization requirements for 

those entities that are taking up the role of securitization of the 

GSEs. 

Also, the Committee should consider its proposed role as the regulator of the Federal Home Loan Banks, yet keeping a securitized 

subsidiary under its purview ensures that the Federal Home Loan 

Bank System remains committed to its mission. 

There are other areas where the bill can do more, particularly in 

the role of Government and multifamily housing market. We would 

also note to fully protect the taxpayers from additional losses like 

those suffered by Fannie and Freddie, the Farm Credit System, 

which continues to follow the model of privatized gains and public 

losses, should be included in this solution. Without similar reforms 

to the Farm Credit System, it is only a matter of time until the 

taxpayers again are put at risk. 

In conclusion, due to the importance of the mortgage market to 

our economy and our families across the country, any reform must 

be deliberate. It must carefully address the many concerns and interests of a wide range of participants and require pragmatic negotiation, compromise, and cooperation. 

There is much more work to be done. This bill is a very well-considered and well-constructed formula on which to begin the process, 

and thank you very much for allowing me to testify, and I am 

happy to answer any questions. 

Chairman TESTER. Well, thank you for your testimony, Mr. Middleton, and thank you all for being here today and for your testimony. 

I think we will just start with 7 minutes on the clock, please, and 

I will just go down the line on these questions. 

Would you or the institutions that you represent be able to offer 

a 30-year fixed-rate mortgage without a Government backstop? 

Mr. HARTINGS. The 30-year fixed-rate mortgage is certainly the 

most popular product that we—portfolio that we originate today. So 

I think it would be very difficult to operate without a credible 30- 

year mortgage product. Now, does it need a Government backstop? 

It certainly needs something. You have to ask the buyers of that 

security more than the seller. I am selling it into Freddie. You have 

24 

to ask the folks that are actually buying that security. Would they 

buy that security without a Government backstop? 

Chairman TESTER. Do you think they would? 

Mr. HARTINGS. I think it would be difficult. I think the Government backstop does give it a credible standard, which is what, if 

you want to buy a security, you want to know a credible standard 

there. So I think it is very important. 

Chairman TESTER. Mr. Hampel. 

Mr. HAMPEL. We would, but very few. We could only make 

enough fixed-rate loans that we could hold on our books, and so 

once we had a sufficient portion of those, we would have to sell 

them to someone else. And in that context, some form of a Government backstop is guaranteed—is necessary. 

You know, some have said that evidence from the jumbo market 

suggests that a Government backstop is really not necessary because we have nonfederally backed up jumbo mortgages that existed up until the crisis. Of course, the crisis did exist, and they 

dried up. 

And, also, the primary risk with a jumbo mortgage is that of prepayment, not of credit risk. What investors do not like about jumbo 

mortgages is that they pay off too fast. 

For a regular mortgage made to a regular person, you know, a 

middle-income—lower-, moderate-, or upper-middle-income person 

in the U.S., what is now conforming size, those are the sorts of 

loans that, if they are for 30-year fixed-rate, they are likely to stay 

on someone’s books for a long, long time. They, therefore, need 

some sort of credit enhancement for an investor to be willing to buy 

that sort of security, especially today. The loans being taken out 

now and for the next few years are very likely to be staying on 

someone’s books for a very long time because of refinancing opportunities at lower rates just are not going to be around anymore. 

So we could make a little bit of them, but nowhere near the 

amount that our members would want. 

Chairman TESTER. OK. Mr Jetter. 

Mr. JETTER. Well, I think that our opinion probably would not be 

too much different. Obviously the Home Loan Banks themselves 

are not making these mortgages. 

Chairman TESTER. Right. 

Mr. JETTER. And we have some programs through which our 

members originate 30-year mortgages—— 

Chairman TESTER. Correct. 

Mr. JETTER. ——that we would take. But clearly, you know, at 

all times and at what rates, I think those are real issues, that 

there may be some 30-year mortgages made, but clearly it would 

not be as appealing in the secondary market as what you see today 

with a Government backstop. 

Chairman TESTER. Mr. Middleton. 

Mr. MIDDLETON. 30-year fixed-rate mortgages, at our bank we 

stratify them. Our affordable housing product usually has several 

layers, structured layers of nonprofits, and we portfolio those. The 

fixed-rate jumbos, we price them for quality and duration. Conforming, we usually sell into the secondary market because it is an 

interest rate risk measure. 

25 

So we use sort of a broad spectrum, and we look at each one, but 

our affordable housing products we like to keep on our books at the 

bank. 

Chairman TESTER. OK. Let us go down the line of affordability 

and price, and I will start with you, Mr. Middleton, and we will go 

the other direction. If there was not a guarantee, if there was not 

that Government backstop, what would you anticipate would happen with both the pricing and the availability of a 30-year fixedrate? 

Mr. MIDDLETON. I think it would disrupt the market. I think 

there are certain sectors that do require a Government backstop at 

certain levels. I think the private sector has to come in quickly if 

the Government discontinues any type of backstop. I think the 

market pricing will change significantly because you are going to 

price to risk. And I think it is going to be harmful to so many middle Americans who need housing. And so I think there is a role for 

it, a needed role for it. 

Chairman TESTER. Mr. Jetter. 

Mr. JETTER. Well, again, we are not in the direct business of 

originating, but our opinion would be similar, that in terms of pricing it would assume the market would not be able to absorb nearly 

what it does now, and the price would be higher than what it is 

today. 

Chairman TESTER. Mr. Hampel. 

Mr. HAMPEL. We definitely think the price would go up, and it 

would likely go up more than the amount of an increase in the 

price necessary to fully fund a private backstop ahead of the Government backstop, so that the system envisioned in the CorkerWarner bill actually is the best of both worlds. It has a Government backstop, but it requires the private sector to pay for that up 

front. 

Chairman TESTER. Good. Mr. Hartings. 

Mr. HARTINGS. Yes, I think no doubt pricing goes up, but I am 

probably a little bit more concerned with access because banks like 

myself proposal are not going to take that interest rate risk. Do I 

get out of that market? Who is going to fill in that market in my 

rural area? And that is probably my bigger concern about the loss 

of that. 

Chairman TESTER. OK. So let us talk about that just for a second, Mr. Hartings. If you are not able to offer a 30-year fixed-rate 

note because either you are priced out of the market or you just 

decide it is just not worth it, there are too many hassles, in a fully 

privatized market, and you are not able to offer the 30-year fixed, 

what does that do to your customers? Not only what does it do to 

your banks and what does it do the customers that your banks 

service? 

Mr. HARTINGS. It would somewhat destroy my business model. 

You know, I mentioned in my testimony we are an 80-percent 

mortgage lender, and half of that today goes to the secondary market. And that is not unlike a lot of community banks out there. 

That business model would—you would have to really re-evaluate: 

What else can I do? What other risks should I be taking out there? 

And it is probably not good risk. So I think it would be very difficult. 

26 

The question, Senator, would be: Is that 30-year mortgage available somewhere else? You know, if that is available at a larger institution, I think you are going to see a lot of folks pack up shop, 

I mean, because we have to have that access. 

The bad news about that is we are packing it up in these rural 

areas and these underserved areas and these areas that really the 

bigger institutions probably do not want to be there today. 

Chairman TESTER. OK. I am out of time, so I will go over to Senator Johanns. 

Senator CORKER. Mr. Chairman, if I could, I have a preset meeting. I know all—no, I am not going to ask any questions. I just 

want to again thank the two of you for your leadership on this 

issue, for focusing in particular on how it affects the smaller institutions, and having witnesses in that are knowledgeable and deal 

with this on a daily basis. I think all too often we do not really talk 

enough with the people who are out on the front lines taking care 

of these kinds of activities. And, again, I want to thank you, and 

I hope that this leads to something that is very constructive. 

Chairman TESTER. Well, thank you. 

Senator JOHANNS. Mr. Chairman, thank you. 

Just a quick follow-up on the Chairman’s question, because as 

each of you were going around, one of the things that occurred to 

me about the 30-year mortgage and the clientele that you are talking about is, you know, I remember when I bought my first house. 

I probably would have loved to have paid it off in 15 years but, 

quite honestly, did not have the economic ability to do it. I was 

thrilled to get a 30-year mortgage, absolutely ecstatic about it. 

It just causes me to think that if we are not doing the right thing 

for the 30-year mortgage, the people who are hurting would be that 

first-time home buyer, that person that maybe is stretching their 

income to get into that house. It is truly the entry-level home 

buyer. Is that observation correct, Mr. Hartings? 

Mr. HARTINGS. I would say your observation is right on. I never 

really thought about it, but, you know, we make 30-year mortgages, we make 15-year mortgages, we make some 5-year 

adjustables. But if you really look at the folks that are the catalyst, 

the mortgage market, that first-time home buyer, they are in that 

30-year mortgage. They are stretching themselves absolutely as far 

as they can go because that is what you have to do to buy the first 

home. So I think that would really hurt that part of the market. 

Senator JOHANNS. Anyone else have any thoughts on that? 

Mr. HAMPEL. Absolutely, Senator. The first-time home buyer, you 

know, it sounds risky to ask the borrower to stretch themselves to 

the limit, but if they do it reasonably in a normal market, it is actually a very good thing for them because they are freezing in their 

housing costs for several years. But we could not—the 15-year 

mortgage is a really good product for a person closer to retirement 

who is trying to reduce their debt. It just does not work for a firsttime home buyer. 

Mr. MIDDLETON. If I may, Senator, it is not only the first-time 

home buyer; it is the second-time home buyer, because of the bubble, the inflation of the value of the house, this will come down to 

a more normalized level so that you do not get this huge flip-up. 

So it is the second generation or the second-time home buyer that 

27 

also would struggle significantly to put down the 20 percent downpayment. 

And, again, I know Jack’s bank, our bank are many, many decades old. We have the second and third generation of our customers 

that they say, you know, go to our community bank and handle 

them. This is not an anomaly. This is routine business all day for 

us. We have about 25 percent of our portfolio in residential mortgages. 

Senator JOHANNS. OK, great. 

Mr. Jetter, one of the things that has intrigued me about what 

you folks do is your mortgage purchase program, which I think has 

really worked well. If you could just take a minute and offer an observation about how that program would work and maybe interface 

with the legislation that we are talking about today. Is this a fit? 

Mr. JETTER. Well, I think it is. I think one of the things that— 

yes, one of the things that you want to do in reforming, I guess, 

the mortgage finance system is to have a variety of avenues 

through which mortgages work, and we think that the mortgage 

programs at the Home Loan Banks have been very successful and 

one of our keys as we work with you and the legislation is being 

able to continue those programs. They seem to be especially appealing to our small community financial institutions who find to a certain degree it is just much easier to work with us in those programs than some of the secondary market channels they might 

look at. 

In addition, they are rewarded directly for taking skin in the 

game, if you will, by being compensated for the credit performance 

of those mortgages, and then it allows us to hold those, again, the 

aggregate volume of that is probably not going to be a lot larger 

than what it is today because it is a balance sheet portfolio item 

for the Home Loan Banks. But for our small community banks, it 

is very appealing, and we have many, many of our members that 

are participating in it. And I do not see anything in the legislation 

in terms of creating the secondary market access that you are talking about with the help of the Federal Home Loan Banks and other 

routes that would necessarily be inconsistent at all with the mortgage programs. 

Senator JOHANNS. One of the things I looked at when I first 

looked at this proposed legislation was how does it fare compared 

to what we have today. What we have today is Fannie and Freddie, 

and I guess we know the problems there, because we saw them 

firsthand. When the market collapsed, taxpayers became responsible, in effect, for a massive amount of debt. 

We are talking about the backstop today, but it occurs to me that 

if this would have been in place a few years ago when the market 

collapsed, we would have had a firewall in front of the taxpayers 

that in all likelihood would have been sufficient to avoid exposure 

for them. 

I was just curious as to whether any of you had looked at that 

aspect of the bill in terms of its merits versus the current system. 

Anybody want to take a swipe at that? 

Mr. MIDDLETON. If I may, Senator, the current system was 

gamed by the GSEs, unfortunately. The system that you are proposing should have the precautions and the structure that would 

28 

eliminate the ability to game the system. And I think you are correct in your observation. It would be an entirely different world 

had we not gone the path we went. 

Mr. HAMPEL. Senator, I think the current system has several design flaws which were exposed by the crisis. They were not actually 

designed. They just evolved and turned out that way. And now 

with the benefit of 20/20 hindsight, this proposal addresses all 

those design flaws, and so it would, I think, dramatically reduced 

the probability of something like this happening again. 

Senator JOHANNS. Go ahead. 

Mr. HARTINGS. Senator, if I could just say, you know, I think you 

are right, hindsight—I am not going to sit here and tell you that 

Fannie and Freddie are not broke. But I really think it is the disconnect of that mortgage process. One of the reasons community 

banks survive through this and still have sold Fannie and Freddie 

good product, we originate and service the loans we bring on their 

books, and really that is probably our best quality portfolio, even 

through all of this problem. 

So I think if you are going to look at hindsight, you have to look 

at that disconnect and say: When did it get disconnected? And how 

do you keep that connection together? 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman TESTER. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

As we consider the reform of mortgage finance, we have to think 

about the role that the Federal home loan banks will play. The 

FHLBs increase liquidity in the system. They are often used by the 

small financial institutions, as you have pointed out, those who 

have limited access to capital markets. And while the FHLBs do 

not require taxpayer dollars, as you rightly point out, and they do 

not have an explicit Government guarantee, they have a line of 

credit with the U.S. Treasury and are widely considered to have an 

implicit guarantee. 

So last month, I wrote to FHFA Director DeMarco asking about 

a multi-billion-dollar line of credit with Sallie Mae, a Fortune 500 

company and the biggest private student lender in the country and 

this line of credit they have with the FHLB. And right now Fannie 

Mae is paying the FHLB one-quarter of 1 percent interest and then 

turning around and making student loans at a rate of 25 times or 

more higher. 

Now, I understand that many people understand that the 

FHLB’s implicit guarantee and the extraordinarily cheap access to 

capital that results helps support mortgages and helps support 

community projects, but I do not think many people know that it 

is helping support the country’s biggest private student loan outfit, 

Sallie Mae. 

So my question is, Mr. Jetter, do you have any thoughts on why 

the FHLBs are in the business of providing loans to Sallie Mae instead of focusing on local institutions that need access to that capital? 

Mr. JETTER. Senator, I understood you might be asking a question on this, and so I have taken a look at it a little. Clearly the 

institution you reference is not a member of my bank, and so I do 

not have any independent or personal knowledge of their activities. 

29 

I do know that we do accept Government-guaranteed student 

loans as collateral, that in the past or in the financial crisis there 

were severe issues in terms of liquidity in that market, and Congress encouraged the banks—I think there was a House bill that 

went through, a sense of the Congress bill, as well as a number of 

Senators that encouraged the Home Loan Banks to look very hard 

at accepting guaranteed student loans as collateral in order to provide more liquidity to the system. And then our regulator worked 

with us to encourage us to accept Government-guaranteed student 

loans as collateral. 

And in terms of our collateral practices, we have members both 

large and small, we have insurance companies, credit unions, 

banks, and thrifts. We adopt collateral rules in terms of what we 

will apply to the lending that goes on there really across the board. 

We do not—— 

Senator WARREN. Mr. Jetter, let me just stop you there to make 

sure that I am understanding this. I actually looked at your Web 

site, and the Web site for the FHLB says, and I will quote: ‘‘The 

purpose of the Federal Home Loan Banks is to be a strong and reliable source of funds for local lenders to finance housing, jobs, and 

economic growth.’’ 

Now, Sallie Mae is a Fortune 500 company worth billions of dollars. It is not a local business. It is not in the business of doing 

real estate loans, helping people buy homes. It is not in a local 

community. And so I am trying to understand how it is that Sallie 

Mae has been able to access capital from the Federal Home Loan 

Bank Boards at one-quarter of 1 percent. 

Mr. JETTER. Well, as I explained, we have—our membership 

rules are defined by Congress as to who is eligible to become a 

member of the system. And we make our advances available based 

on collateral rules that are the same for all the members. So we 

do not distinguish to pick a particular member and say we do not 

believe that that is acceptable for you because of the institution you 

are, but we would think it is acceptable for another institution. We 

actually have a mandate to treat all our members fairly and equally without prejudice. 

Senator WARREN. So actually let me ask you about that on treating everybody fairly and equally. Are the community banks and 

credit unions borrowing for one-quarter of 1 percent? 

Mr. JETTER. It depends on what—they may be borrowing for substantially less, depending on what—it has to do with the term and 

type of advance that they are looking at. But short-term rates, if 

that is what you are looking at, are much less than that for most 

of our members. So I am not sure—as I said, I am not familiar with 

the type of credit that that institution has. I cannot—but I would 

assume, generally speaking for our bank, that those rates would be 

available to all our members or would be very comparable. 

Senator WARREN. Maybe I should ask this the other way. Mr. 

Hampel, I thought your testimony was very interesting about the 

Federal home loan banks and the importance they play in providing capital to small institutions. So let me ask it the other way. 

Is there anything you think we should do or think about going forward to make sure that the Federal home loan banks really are focused on lending to community institutions? 

30 

Mr. HAMPEL. Well, I am familiar with any changes in the charter 

of the home loan banks during the crisis. You know, if Congress 

made changes in whom the Federal home loans banks were supposed to serve during the financial crisis, I suspect the Federal 

home loan banks would have to meet those needs. 

What credit unions use the Federal home loan bank for is not 

such short-term borrowing, because we have plenty of short-term 

funds from our members; we use it to hedge long-term interest rate 

risk. So we will borrow longer term. We would love to pay a quarter of a percent, but, of course, we are going for a longer term. We 

borrow for a much longer term in order to use those funds to make 

long-term loans, put long-term loans on our books. And there are 

limits to the extent we can do that because of capital requirements 

that credit unions face. 

Senator WARREN. I understand. And, Mr. Hartings, would you 

like to add anything? 

Mr. HARTINGS. Yes, I think the Federal Home Loan Bank of Cincinnati, who we deal with, does an excellent job with her MPP program. We really do not use a lot of the borrowing from that, so I 

am not really probably here to tell you rates to help you out with 

that, Senator. 

Senator WARREN. OK. Fair enough. I just think that as we think 

about mortgage finance reform and the role of the Federal home 

loan banks, I am very impressed by what you say on your Web site. 

But we really want to think about whether or not the Federal 

home loan banks and the implicit Government guarantee that 

backs that up and permits it to have money at such a low rate is 

focused on our community banks and credit unions and on helping 

people buy homes and not in other areas. So thank you, Mr. Jetter. 

Thank you, Mr. Chairman. 

Chairman TESTER. Senator Heitkamp. 

Senator HEITKAMP. Just a quick comment, and not to belabor 

this point, but I do want to kind of go on record saying we need 

to be careful with one-size-fits-all, because the bank that the Bank 

of North Dakota deals with, because of their relationship, has been 

able to offer some very interesting and low-cost student products. 

And so we have a great opportunity in North Dakota to partner up, 

and the Bank of North Dakota has been extraordinarily grateful, 

and I think the students in North Dakota have been grateful for 

that relationship. 

So I do not know about the Sallie Mae issues, but I do know that 

we need to be careful because the charter of the Bank of North Dakota is very similar to yours, which is economic development and 

community development, and we think that includes some development of education needs of students and have always interpreted 

the charter of the bank that way. 

I want to get back to maybe the first question that Senator 

Tester asked, which is, without an explicit Federal guarantee, will 

we have a 30-year mortgage market? And, you know, some of you 

were a little clearer than others. Some of you dodged pretty good 

in the response. But I think it is so important that your organizations think long and hard about this and you think, instead of, you 

know, kind of looking at what is going to give you the maximum 

amount of positioning as we move forward with this, take a look 

31 

at what that really means, because I think when we went and negotiated this bill and I came in on the tail end of it, I am convinced 

that, without that, we will price the 30-year mortgage away from 

affordability for first-time and second-time and maybe even thirdtime homeowners. At a time when we have increasing homeowner 

costs in this country, a bigger and bigger percentage of our income 

is being used to pay for our housing. 

And, you know, I am a big believer that no matter what happens, 

if we saw something like this again, even though there is not an 

explicit, there would be an implicit. And so we need to be proactive 

in that direction. 

And so I really encourage you—I do not mean to sound too 

preachy here, but I really encourage you to send a clear message 

about what it is that your institutions need, both your private institutions that you represent today and the organizations that you 

represent today. Because without a clear message, that could, in 

fact, result in a product that will not accomplish what you know 

needs to be accomplished for your institutions but also for the 

American people. 

So, with that said, my question is actually for you, Mr. Jetter. 

You mentioned the regulatory environment for small community 

banks and a lot of our smaller institutions, and you said some has 

been done. This is an issue that I think every person on this Committee has raised one time or the other with the regulators. And 

they keep assuring us they are fixing the problem, that all is well, 

it is coming, do not worry, we are not going to regulate the small 

community banks out of the market. 

Now, you did mention that you were not convinced that the regulatory help is coming, and you said you have some suggestions on 

other things that could be done. And I am curious about what you 

think those other things are that could be done and should be done 

right now by the regulators that are not being considered. 

Mr. JETTER. Well, let me say first of all that I am sure the other 

folks on this panel are probably better suited to actually address 

the specifics of that. What I am really communicating is what my 

members are telling me in terms of the business and what we are 

getting back in terms of the survey results that we conducted. In 

talking to them, I know that in some of the new rules that came 

out on Basel there were some adjustments, but I guess my impression—then I will let these other folks address it, if that is all right 

with you. My impression is that it is just amazing the compliance, 

additional compliance burden that is falling. And it is particularly 

falling on a group that probably follows pretty prudent lending on 

their own if there were no rules. It is interesting when we go out 

and try to talk to a member institution about thinking about participating in the MPF program where they would credit-enhance 

their mortgages, and you ask them, you know, ‘‘What risk are you 

taking and what kind of losses have you had?’’ And for small community banks, the routine answer is, ‘‘Well, we have never had a 

loss because we make prudent loans that people are going to pay 

back, and we work with them if they have problems.’’ And so it is 

quite a bit different. 

But I would defer to the others on the panel who probably have 

a better understanding of specifics. 

32 

Senator HEITKAMP. Just not to belabor the point, but obviously 

you did do a survey, and if there were specifics within that survey 

that you would like to share with me or the Committee, I know 

that we would be interested in seeing those. 

Mr. JETTER. We would be happy to get those to you. 

Senator HEITKAMP. Thank you. Mr. Hampel. 

Mr. HAMPEL. Senator, first of all, to your first question, the 30- 

year fixed-rate mortgage, as we know it, would absolutely not exist 

with some form of a Government guarantee. 

Senator HEITKAMP. Thank you. 

Mr. HAMPEL. A few people would be able to get it from a few very 

large institutions that would survive in the market, but to normal 

people it just would not be available. And that is the first thing. 

The second thing, you have said several times one size fits all. 

That is the problem with the new regulations that have come out 

of the crisis of the last few years. Because some players in the market, not represented at this table, did not behave very well, Congress felt the need to create some sort of basic rules, default rules, 

that if everyone follows those, they know everything will be OK. 

The trouble is what we do as small institutions closer to our members, closer to their customers, we are able to make loans on the 

basis of not having to fit all of the—the QM rule is a perfect example of requiring a one-size-fits-all solution, and the problem is it excludes an awful lot of qualified borrowers simply because it has 

sort of default lines everywhere and a much more complicated loan 

decision than a small local lender is able to deal with. 

Senator HEITKAMP. And what happens to relationship banking? 

Mr. HAMPEL. It goes away. It is mandated—— 

Senator HEITKAMP. It is no longer a relationship. 

Mr. HAMPEL. Right. It is a checklist. 

Senator HEITKAMP. Formula. 

Mr. MIDDLETON. Senator, if I can opine on that, I appreciate the 

question. I think we can turn your question around. What impact 

will it have on a 30-year mortgage? It would definitely ensure its 

viability. Is that clear? 

Senator HEITKAMP. The current—— 

Mr. MIDDLETON. A backstop or the FMIC I think, in my opinion, 

would ensure the viability of the 30-year product. 

With respect to the regulatory issue—I know Jack and I talk 

about this often—it is the number one concern. We have not the 

regulations yet. We are in a Catch-22 on CRA now. We will be put 

into that position by the QM, and the non-QMs. We have not seen 

how we will handle non-QRMs because basically that is our portfolio. It is the second generation, dividing up a farm of 30 acres 

apiece. It does not fit. It is the pieces that—that is our portfolio. 

Well underwritten, always performed, no losses. 

So we have not seen the impact. You start connecting all the 

dots, and you will see just how long this line is, and it is all coming 

at us at once. 

As a billion-dollar bank, we are extremely efficient in compliance. 

We work very hard for that. But we are sort of in awe at what appears to be approaching us, and we are constantly saying, ‘‘How 

can our business models survive with this overwhelming tsunami 

of regulatory process?’’ 

33 

Mr. HARTINGS. Just a few comments. You know, as a banker, we 

always say it is pile-on regulation. I like to point to one, but it is 

this big pile of regulations that is kind of burying us right now. But 

we have been talking about QM, and a good example of QM is portfolio lending. 

I am asked the question once in a while: Will you make a nonQM loan? Well, right now I am making them all the time. But 

when QM goes into place, I may not after that. 

So these are customers—and I am one of those banks that have 

very low losses. My delinquency is well below the national average. 

But yet still I am a major lender in my field. 

So that is the regulation I do not want to see burden community 

banks because it hurts customers. At the end of the day, you know, 

why are we so good at what we do? Because I do not have to look 

at my regulator. I just have to look at my neighbor and probably 

my brother-in-law, and they are the folks that we lend to in our 

area. And I cannot do anything with them because they all know 

where I live. You know, and so we take care of ourselves. Just keep 

that in mind. 

Senator HEITKAMP. Thank you. 

Chairman TESTER. We have got a vote here very shortly, but I 

do have a couple questions, if I might. And these are for everybody 

but Mr. Jetter, OK? 

[Laughter.] 

Chairman TESTER. There are some proposals out there that 

would—and I am sure you are all familiar with the single 

securitization platform that FHFA is working on. There are some 

proposals out there to outsource that single securitization platform 

to private entities. What would the impact of that be? 

Mr. HARTINGS. I think the devil is always in the details, Senator, 

so I am not sure until that gets maybe progressed a little longer 

to really comment from the banking side on what the impact may 

be. 

Chairman TESTER. Let me flesh it out a little more for you, then. 

Assuming that they do outsource it, I would assume that you are 

not going to be a bank that has access to be able to buy that 

securitization platform. 

Mr. HARTINGS. That would be a real fair assumption. 

Chairman TESTER. So it goes to one of the big guys. What is the 

impact going to be? 

Mr. HARTINGS. Again, it looks at maybe taking another piece of 

our business model and destroying it. And how do we continue to 

operate if we have less and less of that business model there? 

Chairman TESTER. Mr. Hampel. 

Mr. HAMPEL. That would raise major concerns about fair and 

equal access to that securitization platform, probably insurmountable, but major concerns. 

Chairman TESTER. OK. Mr. Middleton. 

Mr. MIDDLETON. It would take a rather large platform to do what 

you are saying. 

Chairman TESTER. That is correct. 

Mr. MIDDLETON. So we think it would be greatly out of the reach 

of most community banks or regional banks. I think what you want 

to avoid is a monopoly duopoly. So that would be my position. 

34 

Chairman TESTER. OK. So in all fairness, Mr. Jetter, this next 

question is for you. In a housing finance system without Fannie 

and Freddie or any Government backstop, what would the impact 

be of a proposal that allowed the Federal home loan banks to aggregate, as you do now, but not securitize mortgages on behalf of 

your members? 

Mr. JETTER. So we could aggregate, but ultimately we would 

have to find a buyer of those securities, who then would be issuing 

them on their own. I guess in the example that you said, I imagine 

that would be the large institutions would be who we would need 

to deal with. But ultimately, you know, on what terms it is difficult 

to anticipate. 

Chairman TESTER. Would you anticipate it would increase interest rates? 

Mr. JETTER. If there was not a Government backstop, I am assuming that that would increase interest rates. It is hard to understand how it would not. 

Chairman TESTER. OK. All right. First of all, I want to thank you 

all for your testimony and thank you for your patience in answering the questions. There are a bunch more questions to ask of you 

guys simply because you are the folks that really hit it where the 

rubber hits the road. 

I do want to go back to something that Senator Heitkamp said, 

and I think most of the people behind you understand this, and I 

think you do, too. And, that is, you need to be very, very clear as 

we move forward so you are not aced out of this system. There are 

those that want to do more consolidation in banking, and I think 

this is one good way to try to get more consolidation banking. 

By the way, I am not one of those. I think we need more competition in the marketplace, and we need more guys out there on the 

ground creating more competition to move it forward. 

So I would just say stay in touch, make sure the message is 

clear, because, quite frankly, I think coming from a State like Montana, as I said in my opening, if you guys are not able to do business, it has some pretty major impacts in my neck of the woods. 

So I just want to thank you once again for your testimony. I 

think the hearing has underscored the importance of ensuring that 

community-based institutions have access to that secondary market, and it has given us some food for thought as we move forward 

with housing finance reform in this Committee. 

The hearing record will remain open for 7 days for any additional 

comments or any questions that might be submitted for the record. 

Once again, thank you for your time, and this hearing is adjourned. 

[Whereupon, at 4:49 p.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 

35 

PREPARED STATEMENT OF SANDRA THOMPSON 

DEPUTY DIRECTOR, DIVISION OF HOUSING MISSION AND GOALS, FEDERAL HOUSING

FINANCE AGENCY

JULY 23, 2013 

Chairman Tester, Ranking Member Johanns, and Members of the Committee, my 

name is Sandra Thompson and I am the Deputy Director for Housing Mission and 

Goals for the Federal Housing Finance Agency (FHFA). Thank you for the opportunity to appear before you today to discuss the important role that communitybased financial institutions play in the Nation’s housing finance system. 

As you know, FHFA regulates Fannie Mae, Freddie Mac (the Enterprises), and the 12 Federal Home Loan Banks. Combined, these institutions support over $5.5 

trillion in mortgage assets nationwide. FHFA has also served as the conservator for 

Fannie Mae and Freddie Mac for close to 5 years now. We take this responsibility 

very seriously and have focused on our statutory mandate to ensure the Enterprises 

operate in a safe and sound manner while preserving and conserving their assets. 

Before joining FHFA in March, 2013, I spent 23 years with the Federal Deposit 

Insurance Corporation (FDIC), most recently as Director of the Division of Risk 

Management Supervision. In this capacity, I was responsible for all aspects of 

FDIC’s risk management examination activities for approximately 4,500 FDIC-supervised institutions nationwide, overseeing a distributed workforce of employees 

deployed in six regional offices and 84 field offices across the country. 

At the FDIC, I was involved in several outreach efforts designed to understand 

the vital role that community bankers play not only in their local communities, but 

also in the overall economy. Engaging in regional roundtable discussions and other 

forums, provided valuable insight from community bankers, their trade organizations and State banking commissioners about the challenges and opportunities they 

encounter in the banking industry. 

In a similar manner, FHFA is committed to undertaking outreach efforts to better 

understand the activities of community-based financial institutions in the housing 

finance industry. As discussed later in my testimony, we are meeting with community bankers, credit unions, mortgage bankers and trade associations to help us better understand their access to and interaction with the secondary mortgage markets. Since joining FHFA I have participated in one meeting so far, and what is 

clear is—without access to liquidity, many community-based lenders could not be active in the primary market. 

In my testimony today, I would like to make the following points: 

• Community-based financial institutions play an important role in the provision 

of housing credit; 

• During conservatorship, FHFA has taken meaningful steps to ensure community-based lenders have equal access to the secondary market; and 

• It is vital to ensure that community-based institutions have the ability to fully 

participate in the housing finance system of the future. 

The Role of Community-Based Lenders 

Community-based lenders play an important role in the provision of housing credit. In addition to broadly supporting the financial services needs of their customer 

base, this role is particularly important for certain areas of the country, for certain 

types of borrowers, and for certain types of mortgage products. 

There is no generally accepted definition of ‘‘small lender’’ or ‘‘community bank’’ 

within the industry or between the Enterprises. Federal bank regulators generally 

define them as institutions with under $1 billion in assets, while employing various 

exceptions to this definition. The Enterprises generally define community-based 

lenders as lenders originating less than $1 billion of mortgages per year regardless 

of the institution’s total asset size. 

Despite the fact that community-based lenders account for a small percent of the 

residential mortgage lending market, they have a vital role in serving rural and underserved markets nationally. Most importantly, community-based lenders are committed to the people and the places where they lend money. They are a stabilizing 

force in their local markets and generally engage in responsible lending. Community-based lenders have a long history of making sound mortgage loans, choosing 

not to originate the kinds of abusive and predatory loans that contributed to the 

housing and financial crisis. This type of responsible lending helps local economies 

thrive. 

Community-based lenders are particularly important in smaller and rural communities where lending can be challenging. Standard documentation that aggregators 

or large lenders require from mortgage originators before accepting loans for 

36 

securitization may be more difficult to produce in smaller and rural communities. 

For example, appraisals for collateral located in rural areas and documentation for 

self-employed and seasonally employed borrowers may not be acceptable to a larger 

lender and therefore may not be acceptable for secondary market participation, resulting in many small lenders retaining loans in their portfolios. Having lenders active and involved in smaller markets can be the difference in local borrowers having 

access to single family home financing. 

For many community-based lenders, participation in the primary mortgage market is predicated on their ability to access the secondary market. This requires an 

established relationship with a secondary market participant. Historically, these 

lenders have maintained relationships with Fannie Mae and Freddie Mac, the Federal Home Loan Banks, Government National Mortgage Association (GNMA or 

‘‘Ginnie Mae’’), private label securitizers, and correspondent banks. 

Since the financial crisis, private label securitizers have been almost entirely absent from the single family market, while a number of correspondent banks have 

either curtailed or abandoned that business. Today, a large number of communitybased lenders continue to depend on relationships with Fannie Mae, Freddie Mac 

and/or the Federal Home Loan Banks for access to the secondary mortgage market. 

They also interact with Ginnie Mae when originating FHA and VA loans. 

Also, some community-based lenders that are members of a Federal Home Loan 

Bank are opting to sell their loans directly through the Federal Home Loan Bank 

System’s Acquired Member Asset program. In some cases, the Federal Home Loan 

Bank buys loans outright for its portfolio, but increasingly the Federal Home Loan 

Bank acts as an aggregator for small lenders, buying loans from members and then 

selling them to Fannie Mae. 

The Chicago Federal Home Loan Bank sponsors and administers the Mortgage 

‘‘MPF Xtra’’ program, where whole loans are aggregated directly from members and 

sold to Fannie Mae for securitization. The ‘‘MPF Xtra’’ program is the largest seller 

using cash execution at Fannie Mae, delivering over $6.9billion in residential mortgage whole loans during 2012. Members of seven different Federal Home Loan 

Banks, including Chicago, utilize this cash execution in the secondary market. 

Fannie Mae and Freddie Mac offer mortgage originators two options for delivering 

loans for securitization. Mortgage originators may either sell loans for cash through 

Freddie Mac’s ‘‘cash window’’ or Fannie Mae’s ‘‘whole loan conduit’’ or they may exchange loans for mortgage-backed securities in an MBS swap transaction. In this 

testimony we use the term cash window to refer to both Enterprises’ mechanisms 

for delivering loans for cash. Through the cash window, the Enterprises purchase 

loans that meet their standards directly from lenders, packaging them into securities and selling the securities to the market. The cash window is a mechanism designed to enhance the liquidity of the lender. 

Smaller lenders who do not have the scale to participate in the guarantor business generally use the cash window, although lenders of all sizes sell loans through 

this path. Fannie Mae and Freddie Mac each have an existing selling and/or servicing customer relationship with over 1,000 community-based lenders. Some institutions have relationships with both Enterprises. 

Across all entities conducting business with the Enterprises—including banks, 

credit unions and mortgage bankers—cash window volumes at Fannie Mae tripled 

from 2007 to 2012 and doubled at Freddie Mac over the same period. In 2012, over 

2,200 customers sold $286 billion in loans for cash (one loan at a time or in bulk) 

representing 25 percent of Fannie Mae’s purchase volumes and 19 percent of 

Freddie Mac’s purchase volumes. 

Over the past 5 years, the total volume of loans delivered to the Enterprises by 

community-based lenders has increased substantially. For example, in 2007, only 

3.6 percent of loans delivered to Freddie Mac came from outside the top 100 lenders. 

In 2012, this increased to 15.1 percent of all loans at Freddie Mac, more than a fourfold increase. From 2007 to 2012, the number of community-based lenders at both 

Enterprises increased by 18 percent. 

During Conservatorship, FHFA Has Taken Meaningful Steps to Level the 

Playing Field 

FHFA has undertaken initiatives that maintain and help ensure communitybased lenders have equal access to the secondary market. Last fall, FHFA mandated 

an increase in guarantee fees for mortgage-backed security (MBS) swap transactions 

relative to those charged for cash window transactions. Since large lenders tend to 

engage in swap transactions and small lenders tend to engage in cash transactions, 

the intended effect of these changes was to level the playing field between small and 

large lenders. This action followed price adjustments earlier in the conservatorships 

that had already significantly reduced the substantial pricing advantages large cusVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00040 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
37 

tomers of the Enterprises historically used. Data provided to FHFA by both Enterprises indicates this objective has been achieved. 

FHFA has also directed both Enterprises to align and streamline their servicing 

standards, and has encouraged consistent customer access and management 

through standard eligibility and counterparty requirements. In this regard, FHFA 

has discouraged the implementation of new minimum customer annual activity 

thresholds for selling, servicing, and utilizing the Enterprises’ automated underwriting systems. Freddie Mac’s proposed ‘‘low activity’’ fee of $7,500 would have created a significant financial burden on smaller community-based lenders and discouraged their ability to obtain liquidity in the secondary mortgage market. With FHFA 

encouragement, the fee was changed and now there is only a minimal fee for community-based lenders who have not delivered a loan within the past 3 years. This 

fee allows small lenders to maintain their approved seller status, which is important 

because it keeps the option open to make future sales to the Enterprise. 

It Is Vital To Ensure That Community-Based Lenders Can Participate in 

the Future Housing Finance System 

FHFA believes it is critical to include community-based lenders as we take steps 

to prepare the foundation for a new housing finance system. There should not be 

a significant difference in how large and small lenders are treated when securitizing 

residential mortgage loans. We are developing and executing alignment activities 

between the Enterprises, by establishing common data standards and uniform legal 

and contractual documents. Standardization of both data requirements and contractual language necessary for securitization will go a long way toward leveling the 

playing field between large and small securitizers. 

In 2010, FHFA directed the Enterprises to initiate, develop and deploy a Uniform 

Mortgage Data Program (UMDP). This effort is designed to capture consistent and 

accurate mortgage data, improve loan quality, and enhance risk management capabilities. 

A solid foundation of data standards is crucial to the future of housing finance 

and will allow lenders of all sizes to participate in the marketplace on equal footing. 

Developing an industry standard makes it far easier and cheaper for all lenders, including community-based ones, to acquire the necessary technology from a thirdparty vendor and apply it within their institution. 

A component of UMDP that is currently underway is the Uniform Mortgage Servicing Data (UMSD) project. UMSD will expand and standardize the servicing 

dataset used for managing performing and nonperforming loans and for disclosure 

reporting. FHFA and the Enterprises are working with the industry to define the 

complete UMSD dataset requirements at this time; full build-out and industry adoption is expected to take several years. FHFA and the Enterprises are working with 

the Mortgage Industry Standards Maintenance Organization (MISMO) to ensure 

that UMSD data points are accurately defined and specified for industry adoption. 

We are also working with other Agencies and the Enterprises to standardize origination data collected through the new Consumer Financial Protection Bureau 

(CFPB) Closing Disclosure Form, which integrates parts of the HUD-1 and the final 

Truth in Lending forms. The Enterprises are also working to expand and reorganize 

the data collected on the Uniform Residential Loan Application (URLA). 

FHFA has also made the Enterprises’ development of the technical and functional 

capabilities of the Common Securitization Platform (CSP) a key component of the 

strategic goal to build a new infrastructure for the secondary mortgage market. The 

Common Securitization Platform is the technological means for packaging mortgages into a variety of security structures. It also provides the operational support 

to process and track the payments from borrowers to investors. Initially, the platform will be the infrastructure the Enterprises use for data validation, issuance, disclosure, master servicing, and bond administration for their securities. This framework will connect capital markets investors to homeowners and is being developed 

with the potential to be used by other issuers in the future in a housing finance 

system with or without a Government guarantee. It is also vitally important that 

all lenders, large and small, have access to the Common Securitization Platform. 

Recently, FHFA in conjunction with the American Bankers Association (ABA), 

hosted a meeting with community bankers with operations in towns with populations as low as 11,000 from seven States. These bankers have relationships with 

their Federal Home Loan Bank, and with either Fannie Mae or Freddie Mac. The 

discussion centered on the role these banks play in serving primarily rural, small, 

and potentially underserved communities. The asset size of these institutions 

ranged from $233 million to $508 million. In 2012, they originated between $35 million to $166 million in residential mortgage loans. 

38 

This was the first event in a larger outreach effort FHFA is undertaking to engage community-based lenders. We plan to meet with more groups of communitybased financial institutions over the next month, leveraging the expertise of their 

respective industry trade groups, including the Independent Community Bankers 

Association (ICBA), the National Association of Federal Credit Unions (NAFCU), 

Credit Union National Association (CUNA), the Mortgage Bankers Association 

(MBA), and multiple State Bankers Associations. The meeting with the ICBA member banks will be held in Chicago on August 12th. Similar to the initial meeting 

with the ABA members, we intend to raise and address the following: 

• How to maintain and maximize community-based lender relationships with 

Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; 

• How to ensure community-based lenders are on equal footing with larger competitors; and, 

• The challenges and opportunities community-based lenders face, particularly in 

either rural or underserved areas. 

After we have met with community-based lenders, we will review their feedback 

and consider changes to Enterprise processes and policies that would address issues 

of concern and provide benefit to smaller institutions. 

The Federal Home Loan Banks may also have an opportunity to expand their 

role. This is especially important as the aggregation role for nonjumbo mortgage 

loans provided by the private label securitization model has largely evaporated. As 

Acting Director DeMarco recently commented at the 2013 Federal Home Loan 

Banks Directors Conference, there is opportunity for the Federal Home Loan Bank 

system to expand upon the limited loan aggregation role they are playing today with 

the Mortgage Partnership Finance (MPF) programs. With the existing cooperative 

structure, the Federal Home Loan Banks could offer liquidity with securities markets levels of execution, aggregating nonhomogenous mortgage loans from members 

that would be funded with capital from global sources. As we consider a future secondary market with a reduced Government guarantor role, providing members with 

aggregation services to access various types of secondary market execution might 

become an important opportunity for the Federal Home Loan Banks. 

Conclusion 

As we move closer to reforming our Nation’s housing finance system, it is important to ensure that community-based lenders are able to fully participate in the new 

system. In many respects, this means ensuring equal access to the secondary mortgage market, since for many community-based lenders the ability to be active in the 

primary market is based on an ability to access the secondary market. As conservator, FHFA has taken several steps to level the playing field for community-based 

lenders. We believe ensuring their participation in the future system is in the public 

interest and we stand ready to work with this Committee to see this goal reached. 

Thank you, and I am pleased to answer any questions you may have. 

PREPARED STATEMENT OF JACK A. HARTINGS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE PEOPLES BANK COMPANY, 

COLDWATER, OHIO, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF

AMERICA

JULY 23, 2013 

Chairman Tester, Ranking Member Johanns, Members of the Subcommittee, I am 

Jack Hartings, President and CEO of The Peoples Bank Company and Vice Chairman of the Independent Community Bankers of America. The Peoples Bank Company is a $400 million asset bank in Coldwater, Ohio. I am pleased to represent 

community bankers and ICBA’s nearly 5,000 members at this important hearing on 

‘‘Creating a Housing Finance System Built to Last: Ensuring Access for Community 

Institutions’’. We are grateful for your recognition of the critical importance of preserving community bank access in any reforms to the housing finance system. It is 

essential to borrowers and the broader economy that the details of any reform are 

done right. We sincerely appreciate the opportunity we’ve been given to work with 

members of this Committee to craft housing finance reform legislation. We look forward to providing ongoing input on the impact of reform on community banks and 

their customers. 

39 

1 ICBA Mortgage Lending Survey. September 2012. 

Community Banks and the Mortgage Market 

Community bank mortgage lending is vital to the strength and breadth of the 

housing market recovery. Community banks represent approximately 20 percent of 

the mortgage market, but more importantly, our mortgage lending is often concentrated in the rural areas and small towns of this country, which are not effectively served by large banks. For many rural and small town borrowers, a community bank loan is the only mortgage option. 

A vibrant community banking sector makes mortgage markets everywhere more 

competitive, and fosters competitive interest rates and fees, better customer service, 

and more product choice. The housing market is best served by a large and geographically dispersed number of lenders. Five years after the financial crisis, an already concentrated mortgage market has become yet more dangerously concentrated. We must promote beneficial competition and avoid further consolidation 

and concentration of the mortgage lending industry. 

The Peoples Bank Company has been in business for 108 years. We survived the 

Great Depression and numerous recessions before and since—as have many other 

ICBA member banks—by practicing conservative, commonsense lending. We make 

sure loans are affordable for our customers and they have the ability to repay. 

Loans are underwritten based on sound practices using our personal knowledge of 

borrowers and their circumstances. 

Fair Access to the Secondary Market 

Secondary market sales are a significant line of business for many community 

banks. According to a recent survey, nearly 30 percent of community bank respondents sell half or more of the mortgages they originate into the secondary market. 1

When community banks sell their well-underwritten loans into the secondary market, they help to stabilize and support that market. Community bank loans sold to 

Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are underwritten as though they were to be held in the bank’s portfolio. 

While community banks choose to hold many of their loans in portfolio, it is critical for them to have robust secondary market access in order to support lending 

demand with their balance sheets. For example, I have a portfolio of 867 loans with 

a balance of $81 million we originated and sold to Freddie Mac. Loan sales to 

Freddie Mac allow me to support the broad lending needs in my community, particularly with fixed-rate loans demanded by my customers. As a community bank, 

it is not feasible for me to use derivatives to offset the interest rate risk that comes 

with fixed-rate lending. Secondary market sales eliminate this risk. The ability to 

sell single loans for cash, not securities, is critical to my bank because I don’t have 

the lending volume to aggregate loans before transferring them to Freddie Mac. In 

addition, I have the assurance that Freddie Mac won’t appropriate data, from the 

loans sold, to solicit my customers with other banking products. 

Even those community banks that hold nearly all of their loans in portfolio need 

to have the option of selling loans in order to meet customer demand for long-term 

fixed-rate loans. Meeting this customer demand is vital to retaining other lending 

opportunities and preserving the relationship banking model. 

While many community banks remain well capitalized following the financial crisis, others are being forced by their regulators to raise new capital, even above minimum levels. With the private capital markets still largely frozen for small and 

midsized banks, some are being forced to contract their lending in order to raise 

their capital ratios. In this environment, the capital option provided by the secondary markets is especially important. Selling mortgage loans into the secondary 

market frees up capital for more residential mortgages or other types of lending, 

such as commercial and small business, which support economic growth in our communities. 

Many community banks would like to sell more loans but for the challenge of 

identifying ‘‘comparable’’ sales, as required by Fannie Mae and Freddie Mac, in 

rural markets where properties have unique characteristics such as large plots of 

land. The nearest comparable may be 60 miles away. 

In addition to selling mortgage loans to Freddie Mac, my bank participates in the 

Mortgage Purchase Program (MPP) through the Federal Home Loan Bank of Cincinnati. While our loan sales to the MPP—33 serviced loans with an outstanding 

balance of $4.4 million—are only a fraction of our sales to Freddie Mac, we’re 

pleased to have this alternative secondary market access. The Federal Home Loan 

Banks (FHLBs) are a critical source of liquidity to support community bank mortgage lending. The FHLBs were particularly important during the financial crisis 

40 

when they continued to provide advances to their members without disruption while 

other segments of the capital markets ceased to function. The FHLBs must remain 

a healthy, reliable source of funding. 

Key Features of a Successful Secondary Market 

The stakes involved in getting housing-finance market policies right have never 

been higher. Housing and household operations make up 20 percent of our economy 

and thousands of jobs are at stake. 

With regard to the secondary market, if the terms are not right, the secondary 

market could be an impractical or unattractive option for community banks. Below 

are some of the key features community banks require in a first-rate secondary market. 

Equal access. To be sustainable and robust, a secondary market must be impartial 

and provide equitable access and pricing to all lenders regardless of their size or 

lending volume. Without the appropriate structure, a secondary market entity will 

have a strong incentive to offer favorable terms to only the largest lenders. Such 

an outcome would drive further industry consolidation, increase systemic risk and 

disadvantage the millions of customers served by small lenders. 

Financial strength and reliability. A secondary market must be financially strong 

and reliable enough to effectively serve mortgage originators and their customers 

even in challenging economic circumstances. Strong regulatory oversight is needed 

to ensure the secondary market operates in a safe and sound manner. 

No appropriation of customer data for cross-selling of financial products. When a 

community bank sells a mortgage to a secondary market entity, it transfers proprietary consumer data that would be highly valuable for the purposes of cross-selling 

financial products. Without large advertising budgets to draw in new customers, 

community banks grow by deepening and extending their relationships with their 

current customer base. Secondary market entities must not be allowed to use or sell 

this data. Community banks must be able to preserve customer relationships and 

franchises after transferring loans. 

Originators must have the option to retain servicing and servicing fees must be reasonable. Originators must have the option to retain servicing after the sale of a loan. 

In today’s market, the large aggregators insist the lender release servicing rights 

along with the loan. Transfer of servicing entails transfer of data for cross-selling, 

the concern identified above. While servicing is a low-margin business, it is a crucial 

aspect of the relationship-lending business model, giving a community bank the opportunity to meet the additional banking needs of its customers. 

Limited purpose and activities. The resources of any secondary market entities 

must be focused on supporting residential and multifamily housing. They must not 

be allowed to compete with originators at the retail level where they would enjoy 

an unfair advantage. The conflicting requirements of a public mission and private 

ownership must be eliminated. 

Private capital must protect taxpayers. Securities issued by secondary market entities must be backed by private capital and third-party guarantors. Any Government 

catastrophic loss protection must be fully and explicitly priced into the guarantee 

fee and the loan level price. This guarantee would provide credit assurances to investors, sustaining robust liquidity even during periods of market stress. 

The Future of the Secondary Markets 

There is widespread agreement the secondary market must be reformed. An aggressive role for the Government in housing is no longer a viable option. The private 

sector should and will take the lead in supporting mortgage finance. ICBA welcomes 

this new reality as an appropriate response to the moral hazard and taxpayer liability of the old system. Community banks are prepared to adapt and thrive in this 

environment. But whatever replaces Fannie Mae and Freddie Mac must have features to allow community banks to continue to prosper as mortgage lenders and to 

serve their communities. 

The worst outcome in GSE reform would be to allow a small number of megafirms 

to mimic the size and scale of Fannie and Freddie under the pretense of creating 

a private sector solution strong enough to assure the markets in all economic conditions. Moral hazard derives from the concentration of risk, and especially risk in the 

housing market because it occupies a central place in our economy. Any solution 

that promotes consolidation is only setting up the financial system for an even bigger collapse than the one we’ve just been through. 

The GSEs must not be turned over to the firms that fueled the financial crisis 

with sloppy underwriting, abusive loan terms, and an endless stream of complex 

securitization products that disguised the true risk to investors while generating 

41 

enormous profits for the issuers. These firms must not be allowed to reclaim a central role in our financial system. 

ICBA is pleased to see a robust debate emerging on housing finance reform. A 

number of serious proposals have been put forth to date—both from within Congress 

and from outside—all of which combine promising features with others that warrant 

additional consideration and reworking. 

The Housing Finance Reform and Taxpayer Protection Act 

ICBA is grateful to Senators Warner, Corker, Tester, and Johanns for introducing 

S.1217, the Housing Finance Reform and Taxpayer Protection Act, as well as Senators Hagan, Moran, Heller, and Heitkamp. ICBA sincerely appreciates the opportunity to provide input into this bill. We are encouraged by the inclusion of certain 

provisions to accommodate ICBA’s concerns. In particular: 

• The Mutual Securitization company would secure access to the secondary market for community banks and other small originators and would allow them to 

sell loans for cash and to retain servicing rights. 

• The Federal Home Loans Banks would also be allowed to issue securities, creating another access point for community banks. 

• Limiting issuers to no more than 15 percent of outstanding guaranteed securities would reduce concentration in the securitization market by large banks or 

Wall Street firms. 

• The FMIC guarantee, well insulated by private capital, would insure the 

securitization market continues to function in times of market stress. 

These provisions would help provide access for community banks to the secondary 

market without requiring them to take on the additional risk and cost of 

securitizing loans. We look forward to continuing to work with you and the other 

cosponsors and the Chairman and Ranking Member to further strengthen the bill 

and ensure it serves the needs of community bank customers. 

Closing 

Thank you again for the opportunity to testify today. Private entities must play 

a more robust role in the mortgage securitization market and taxpayers must be 

more effectively insulated from any market failures. That much is settled. But it is 

critically important the details of reform are done right to ensure community banks 

and lenders of all sizes are equally represented and communities and customers of 

all varieties are served. 

PREPARED STATEMENT OF BILL HAMPEL 

SENIOR VICE PRESIDENT AND CHIEF ECONOMIST, CREDIT UNION NATIONAL

ASSOCIATION

JULY 23, 2013 

Chairman Tester, Ranking Member Johanns, Members of the Subcommittee, 

thank you very much for the opportunity to testify at today’s hearing entitled, ‘‘Creating a Housing Finance System Built to Last: Ensuring Access for Community Institutions’’. My name is Bill Hampel, Senior Vice President and Chief Economist at 

the Credit Union National Association (CUNA) headquartered in Madison, Wisconsin. CUNA is the largest credit union industry trade association representing 

America’s State and federally chartered credit unions and their nearly 97 million 

members. 

Overview of Credit Union Mortgage Lending 

As member owned, not-for-profit financial cooperatives, credit unions strive to 

meet their member’s financial services need, and offering home mortgages is an important part of meeting member demand. Some credit unions have made first mortgage loans since their inception, but most did not offer mortgage lending services 

until the 1970s. Credit unions now serve more than 96 million Americans, and first 

mortgage lending is an increasingly important component of credit union lending. 

First mortgages now account for 41 percent of the total loans held in portfolio, with 

the remaining 59 percent of a credit unions portfolio comprised of second mortgages 

[13 percent], consumer loans [39 percent], and small business loans [7 percent]. Just 

last year alone, credit unions originated $123 billion of first mortgages, representing 

6.5 percent of the entire mortgage origination market. Credit unions are now significant players in residential real estate finance, and historically our market share has 

risen annually to reflect the growing demand of our members. 

42 

Currently, 4,300 credit unions (62 percent) offer first mortgages to their members. 

Because larger credit unions are more likely to offer mortgages than smaller ones, 

88 million (92 percent) of all credit union members belong to a credit union that 

offers first mortgages. It is clear that consumers are choosing credit unions more 

and more to be their mortgage lenders, and as Congress considers housing finance 

reform, it is critical that credit unions have equitable and readily available access 

to a functioning, well-regulated secondary market and a system that will accommodate the member-demand for long-term fixed-rate mortgages products in order to 

ensure they can continue meeting their members’ mortgage needs. 

Historically, with fields of membership tied to larger employers, credit unions 

have a greater presence in urban areas than in rural districts. At the end of 2012, 

1.1 percent of credit union members belonged to credit unions headquartered in 

rural districts. These credit unions originated $750 million of first mortgage loans 

in 2012, or 1.2 percent of the number of loans originated in 2012. 

From 2000 to 2006, annual credit union originations of first mortgages averaged 

just under $55 billion. As the subprime mortgage crisis began to weaken the secondary market for mortgage loans in 2006 and 2007, credit union origination volume began to rise dramatically. Homebuyers increasingly turned to their credit 

unions as other sources of mortgage lending dried up. Credit unions were able to 

meet this demand because at the time they primarily funded loans from their own 

portfolios, and their conservative financial management as cooperatives meant they 

were less affected by the financial crisis than many other lenders. By 2009, credit 

union originations rose to $94 billion. New loan volume fell to just above $80 billion 

in 2010 and 2011 before rising to over $120 billion in 2012 and the first quarter 

of 2013, at an annual rate. This recent increase in volume is due to the desire on 

the part of many members to refinance their loans given very low interest rates. 

2013: First Quarter, Annualized 

Total first mortgage originations from all lenders peaked at $3.1 trillion in 2005 

before plunging to only $1.5 trillion in 2008. Since then, originations have recovered 

to just over $1.9 trillion in 2012, at an annual rate of $2 trillion in the first quarter 

of 2013. Because credit union lending increased while the broader market was 

wracked by the financial crisis, the credit union share of mortgage lending sharply 

increased, from less than 2 percent in 2005 to almost 6 percent in 2008. Since then, 

as the broader mortgage market recovered, credit union lending continued to grow 

to the point that it accounted for over 6 percent of the market in 2012 and 2013. 


72313001.eps
43 

Historically, credit unions have been largely portfolio lenders. From 2000 to 2008, 

credit unions sold only a third of first mortgage originations, ranging from a low 

of 26 percent in 2007 to a high of 43 percent in 2003. The decision of whether to 

hold or sell a loan depends primarily on asset liability-management issues, essentially the need to manage interest rate risk, but also at times, depends on the availability of liquidity in the credit union. Asset liability management hinges on such 

factors as the level of interest rates, the relative demand for fixed versus adjustable 

loans from members, the amount of fixed-rate loans and other longer-term assets 

already on a credit union’s books, and the maturity of the credit unions funding 

sources. Managing credit risk is not the primary factor in secondary market decisions by credit unions. 

As long-term interest rates plunged in 2009 and again in 2011, credit unions 

found it increasingly important to sell longer-term, fixed-rate mortgages to avoid 

locking in very low earning assets for the long term. As a result, the proportion of 

loans sold almost doubled, to an average of 52 percent from 2009 to 2012, and as 

much as 58 percent in the first quarter of 2013. 

Servicing member loans is very important to credit unions, for a number of reasons. As member owned cooperatives, credit unions are driven by a desire to provide 

high quality member service. Many credit unions are reluctant to entrust the core 

function of serving members to others, unless they have a stake and a say in the 

entity doing the servicing. Credit unions are also concerned that third-party 

servicers might use the data they gather about credit union members to market 

competing products or services. As such, many credit unions service both the substantial portfolios of loans they hold on their own balance sheets, and the loans they 

have sold to the secondary market. Currently, in addition to the $248 billion of first 

mortgages that credit union hold in portfolio, they also service $145 billion of loans 

they have sold. 

The credit quality of credit union first mortgages held up remarkably well during 

the recent financial crisis, especially when compared to the experience of other lenders. Prior to the Great Recession, annual net charge-off rates on residential mortgage loans at both banks and credit unions were negligible, less than 0.1 percent. 

However, as the recession took hold, losses mounted. At credit unions, the highest 

annual loss rate on residential mortgages was 0.4 percent. At commercial banks, the 

similarly calculated loss rate exceeded 1 percent of loans for 3 years, reaching as 

high as 1.58 percent in 2009. 

There are two reasons for this remarkable record at credit unions. First, as cooperatives, credit unions tend to be more risk-averse than stock-owned institutions. 

The incentives faced by credit union management (generally uncompensated volunteer boards, the absence of stock options for senior management and board members, the absence of pressure from stockholders to maximize profits) induce management to eschew higher-risk, higher-return strategies. As a result, credit union operVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON

72313002.eps
44 

ations are less risky, and subject to less volatility over the business cycle. This 

largely explains why credit unions were able to increase lending as the financial crisis deepened. 

Second, since the bulk of credit union lending is intended to be held in portfolio 

rather than sold to investors, credit unions tend to pay particular attention to such 

factors as a member’s ability to repay a loan, proper documentation and due diligence, and collateral value before granting loans. 

We believe that in addition to ensuring access to the secondary market for credit 

unions, it is also important that the housing finance system Congress puts in place 

accommodates the demand of credit union members and other consumers for longterm, fixed-rate mortgage products. The data suggest that credit union members 

overwhelmingly prefer fixed-rate mortgages. Over the past 10 years, our members 

have chosen a fixed-rate product over 80 percent of the time, compared to a variable 

rate mortgage (see graph below). Just in the first quarter of 2013, 86 percent of the 

mortgages issued by credit unions were fixed-rate products. Congress should acknowledge that the American homebuyer prefers a fixed-rate mortgages and do everything in its power to ensure this important mortgage product remains a valuable 

part of housing finance. 

Overview of CUNA Principles for Housing Finance Reform 

As Congress studies and debates the issue of housing finance reform, we would 

like to share with this Committee our general principals with respect to the secondary market needs of credit unions: 

1. There must be equal and unbiased access to the secondary market for lenders 

of all sizes. CUNA understands that the users—lenders and borrowers—of a 

reformed secondary market will be required to share in the cost of housing finance. However, these fees should not penalize smaller institutions due to 

lender volume. 

2. A strong regulator must be created so that rigorous oversight of the market 

will ensure safety and soundness, standardization within the system and guarantee equal access. 

3. The new system must provide for liquidity in all economic times and recognize 

that all qualified borrowers have the ability to obtain a mortgage. 

4. The new housing finance system should emphasize consumer education and 

counseling as a means to safeguard consumers so they may receive appropriate 

mortgages. 

5. Proper attention should be given to provide products that are predictable and 

affordable to all qualified borrowers. The 30-year fixed-rate mortgage has traditionally been the product that best fulfills this requirement. 


72313003.eps
45 

6. Reasonable conforming loan size limits that adequately take into consideration 

variations in local real estate costs should be considered as a necessary component of any legislation. 

7. Credit unions strongly believe in the ability to retain the servicing rights of 

their members mortgages when sold on the secondary market. 

8. The transition from the current system to any new housing finance system 

must be reasonable and orderly. 

The Secondary Mortgage Market Reform and Taxpayer Protection Act of 

2013 

Credit unions appreciate and applaud Senators Corker, Warner, Tester, Johanns, 

Heitkamp and Heller for introducing S.1217, the ‘‘Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013’’. This bill is a right step towards reforming the housing finance system and pays special attention to smaller lenders, like 

credit unions, while protecting the American taxpayer. 

At the heart of the legislation is the creation of the Federal Mortgage Insurance 

Corporation (FMIC) that will operate with a Federal charter. The FMIC is designed 

to foster liquidity and the availability of mortgage credit in the secondary mortgage 

market, while protecting the taxpayer from losses. The bill calls for the wind-down 

of Fannie Mae and Freddie Mac within 5 years, but allows for flexibility to protect 

markets from overacting if more time is needed to sell the Fannie and Freddie portfolios. CUNA understands there may be negative market reaction to the shuttering 

of the Government Sponsored Enterprises (GSE) and we appreciate that thought 

has been given to the ramifications for home mortgage finance if this process takes 

places in an expedited manner. 

The management of the FMIC will be conducted by a Director who will be appointed for 5 years and chairperson to a five person Board of Directors with varying 

backgrounds in mortgage insurance markets, assets management, community-based 

financial institutions, and multifamily housing development. Creation of the independent board is a thoughtful approach to the management of the FMIC, but because of the unique structural nature of credit unions we urge that a seat on the 

FMIC be reserved for a representative of the credit union system. 

Mortgage Insurance Fund and the Government Guarantee 

The creation of a Mortgage Insurance Fund (MIF) with the intent to cover any 

losses incurred by mortgage securities traded and held in the secondary market, 

capitalized by premiums collected from issuers and investments held in portfolio is 

an acceptable approach that will protect taxpayers from losses in the event of a catastrophic economic event. CUNA appreciates that the MIF will have the ‘‘full faith 

and credit of the U.S. Government’’ and strict regulation by the FMIC, which will 

ensure overpricing of mortgages does not occur. 

In addition to the MIF, the bill sets into place a full Government guarantee as 

the ultimate backstop and we appreciate that it would only be used ‘‘in unusual and 

exigent market conditions’’ no more than once in any given 3 year period. CUNA 

fully supports the inclusion of an explicit Government guarantee and the market 

stability that accompanies this provision. 

Exclusion of the Qualified Residential Mortgage and Considerations of a Qualified 

Mortgage 

Credit unions also welcome the inclusion of section 207 that would eliminate for 

credit unions and other lenders risk retention requirements that are to be implemented under Qualified Residential Mortgage (QRM) standards that are being developed by regulators. Allowing financial institutions to sell properly underwritten 

mortgages to the secondary market without the unnecessary burden of retaining a 

significant portion of the loan on a credit unions balance sheet is greatly appreciated. 

We urge the committee to take a closer look at the Qualified Mortgage (QM) rule 

issued by the Consumer Financial Protection Bureau earlier this year as you consider housing finance reform. Historically, credit unions have been portfolio lenders, 

holding 60–75 percent of the mortgages they write on the books in most years prior 

to the financial crisis. The incentives of portfolio lenders are different from those 

that primarily sell into the secondary market, given that the lender bears the entire 

risk of default. Portfolio lenders have strong incentives to pay close attention to the 

borrower’s ability to repay, and credit unions, given that their members are also 

their owners, have especially strong incentives to employ sound underwriting practices. There is a very real concern that credit unions will not be able to offer mortgages to their members who do not meet all of the QM standards, but nevertheless 

have the ability to repay a mortgage loan. Our prudential examiners may ‘‘encourVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
46 

age’’ credit unions to focus only on QMs as a way to limit a lender liability, furthermore, the secondary market may be unwilling to accept non-QM loans if viewed negatively by regulators. However, strict adherence to QM does not facilitate the kind 

of creative products that are possible through portfolio lending based on the individual circumstances of each member. 

Simply put: credit unions have every incentive to evaluate a member’s ability to 

repay because their members are also their owners. We encourage the Committee 

to work with the CFPB and prudential regulators to ensure lenders with a proven 

history of properly writing non-QM loans will retain the continued ability to serve 

the mortgage finance needs of all members who can afford an appropriately structured mortgage, whether it is QM or not. 

Secondary Market Access 

Section 215 would establish a ‘‘Mutual Securitization Company (MSC)’’ the purpose of which would be ‘‘to develop, securitize, sell, and meet the issuing needs of 

credit unions and community and midsize banks with respect to covered securities.’’ 

CUNA strongly supports the creation of the MSC that will ensure credit union access to a well regulated secondary market in a manner that will safeguard fairness 

and market liquidity during every economic occurrence. 

Credit unions do have concerns regarding the relatively low asset cap of $15 billion per institution. As the marketplace continues to force never ending changes to 

the size of community based financial institutions, thought must be given to the future appearance of these organizations. Credit unions have seen the largest influx 

of membership in our history, gaining over 2 million members in the past year. As 

more Americans embrace the benefits of becoming a credit union member, we fully 

expect the explosion in credit union membership growth to continue. As a direct result of such growth many credit unions over the next 10 to 15 years could be above 

the $15 billion asset cap. We urge the committee to consider higher caps so that 

more community based institutions can access the MSC. Increasing the eligibility 

size of credit unions and community banks will also ensure that the MSC is well 

capitalized, guaranteeing its future stability. 

The bill would also increase the role of the Federal Home Loan Bank (FHLB) system in the securitization process of mortgages to the secondary market. CUNA encourages the increased usage of FHLBs and sees the entities as a positive force in 

housing finance. As we have previously noted for the sponsors of the legislation, 

only a small number of credit unions use the Federal Home Loan Banks, due in 

large part to FHLB requirements that hinder their access. For example, in order 

to join a FHLB, a portion of a credit union’s qualifying assets must be in either 

mortgages or mortgage backed securities, which creates problems for smaller credit 

unions. Further, State chartered privately insured credit unions are not permitted 

to join a FHLB. 

Conclusion 

In conclusion, CUNA recognizes that reforming the secondary market to ensure 

a viable housing market is no easy task. We greatly appreciate the leadership this 

Committee has put forward in addressing the needs and concerns of our members 

so that the American dream of home ownership will not be disadvantaged by inflated costs and Government imposed limitations that could result in undue impediments that would hinder access to a safe and affordable secondary market. 

PREPARED STATEMENT OF ANDREW J. JETTER 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, FEDERAL HOME LOAN BANK OF TOPEKA, 

ON BEHALF OF THE COUNCIL OF FEDERAL HOME LOAN BANKS

JULY 23, 2013 

Good Afternoon Chairman Tester, Ranking Member Johanns, and Members of the 

Subcommittee. My name is Andrew Jetter and I am the President and CEO of the 

Federal Home Loan Bank of Topeka. I appreciate the opportunity to speak to you 

today on behalf of the Council of Federal Home Loan Banks (Council), a trade association representing all of the Federal Home Loan Banks (FHLBanks). 

Federal Home Loan Bank System Overview 

Initially, I would like to describe the FHLBanks and their critical role in providing cost-effective funding and other services to members to assist them in financing housing and community and economic development. Following that, I will address our understanding of the role of community financial institutions in providing 

47 

1Federal Reserve Bank of New York, Staff Report No. 357 at pp. 28–29 (November, 2008). 

2 ‘‘May You Live in Interesting Times’’, Remarks of William Dudley, Executive Vice President 

of the Federal Reserve Bank of New York, October 17, 2007. 

mortgage finance, the challenges they face, and how the FHLBanks currently assist 

them in that role. 

The FHLBanks were created in 1932 to support America’s housing finance system 

through their member thrift institutions and insurance companies. Since that time, 

Congress has expanded the mission of the FHLBanks to include support for affordable housing, community development, and other forms of community lending and 

has expanded eligibility for membership in the FHLBanks to commercial banks, 

credit unions, and community development financial institutions. Advances (fully secured loans to member institutions) represent the core of the FHLBanks’ business. 

Members rely on the FHLBanks to provide competitive access to liquidity across all 

economic and credit cycles. This liquidity enhances the financial strength of local 

lenders so that they can meet the housing finance and other credit needs of their 

communities through a range of products and services. 

During the Nation’s financial crisis, when dislocations in the capital markets 

made funding from other sources difficult, the FHLBanks were a critical source of 

funding for U.S. financial institutions, preventing far greater losses and potential 

failures. The FHLBanks were able to increase their lending to members of every 

asset size and in every part of the country by $370 billion—from a total of $650 billion in the second quarter of 2007 to over $1 trillion in the third quarter of 2008. 

The FHLBanks were able to carry out this essential liquidity function for their 

members without requiring taxpayer assistance. The crucial role played by the 

FHLBanks was recognized in an extensive study prepared by the staff of the Federal Reserve Bank of New York. This study found that during the financial crisis 

the Federal Home Loan Bank System was ‘‘by far, the largest lender to U.S. depository institutions while most of the Federal Reserve’s liquidity operations have been 

for the benefit of nondepository institutions or foreign financial institutions.’’ 1 The 

backstop role played by the FHLBanks was also recognized by William Dudley, 

President of the Federal Reserve Bank of New York, who noted that when the interbank lending market dried up in 2007, depository institutions turned to the Federal 

Home Loan Bank System for needed liquidity. 2

The FHLBank System’s Unique Structure Has Enabled It to Successfully 

Fulfill Its Mission Since 1932 

The FHLBanks have been able to successfully fulfill their mission as a result of 

several unique characteristics: their cooperative structure; a scalable, self-capitalizing, operating model; broad participation by a diverse membership; and dependable access to a deep, liquid market for FHLBank debt. 

Cooperative Structure 

The FHLBank System has a unique structure, comprised of twelve independent 

cooperatives and the Office of Finance that issues debt on behalf of those twelve regional FHLBanks. The FHLBanks are overseen by an independent regulator, the 

Federal Housing Finance Agency (FHFA), established by the Housing and Economic 

Recovery Act of 2008 (HERA Act of 2008). Each FHLBank is a separate and distinct 

corporate entity with its own stockholder—member institutions and its own board 

of directors. While the FHLBanks issue debt collectively and are jointly and severally liable for the repayment of those debt obligations, there is no single controlling 

entity with responsibility for or authority over the FHLBanks. Each FHLBank operates independently under the authority granted by Congress through the Federal 

Home Loan Bank Act, as amended, and in accordance with the regulations established by the FHFA. 

Each FHLBank operates within a district originally established by the Federal 

Home Loan Bank Board, one of the predecessors to the FHFA. Each FHLBank’s 

capital stock can only be purchased by its member institutions. Each member must 

purchase the FHLBank’s capital stock in order to become a member, and must 

maintain capital stock holdings sufficient to support its business activity with the 

FHLBank in accordance with the individual FHLBank’s capital plan. 

Scalable, Self-Capitalizing, Operating Model 

The FHLBank System is built to be scalable—advance levels ebb and flow with 

credit cycles to match member demand. Since the height of the crisis, advances have 

declined by more than half as weak asset growth and excess liquidity have reduced 

members’ need for advances. The decline in advance levels, following their rapid expansion, demonstrates that the FHLBank model works as intended. 

48 

As cooperatives, FHLBanks are not subject to the growth imperative that often 

drives the decisions of publicly traded corporations. Demand for advances expands 

and contracts with economic and market conditions and the FHLBanks’ capital 

stock outstanding appropriately adjusts to these changes. Although the specific requirements vary based on each FHLBank’s capital plan, an institution must hold 

a certain level of capital stock to be a member. In addition, a member must maintain ‘‘activity-based’’ capital stock in proportion to the amount of advances it has 

outstanding. 

During periods of credit expansion, the activity-based stock requirement automatically provides additional capital to support advances growth. For example, in the 

recent liquidity crisis, the signficiant increase in advances was accompanied by the 

purchase of additional capital stock to support those advances, thereby providing additional capital to the FHLBanks in direct proportion to the increase in assets. This 

allowed each FHLBank to meet the liquidity needs of its members while preserving 

the safety and soundness of the cooperative. 

An FHLBank’s capital stock cannot be issued to or held individually by members 

of an FHLBank’s board of directors, its management, its employees, or the public, 

and is not publicly traded. There is no market for FHLBank capital stock other than 

among FHLBank members. The price of an FHLBank’s capital stock cannot fluctuate, and all FHLBank capital stock must be purchased, repurchased, or transferred only at its par value. There are no stock options or other forms of stock-based 

compensation for FHLBank management, directors, or employees. 

Broad Participation by a Diverse Membership 

The membership of the FHLBank System consists of thrifts, commercial banks, 

credit unions, insurance companies, and community development financial institutions. At the end of first quarter of 2013, the FHLBanks had 7,604 members, composed of: 967 thrifts; 5,169 commercial banks; 1,185 credit unions; 268 insurance 

companies; and 15 community development financial institutions. 

The composition of the FHLBank membership closely approximates the composition of the banking industry: 88 percent of members have less than $1 billion in 

assets compared with 91 percent of all banks and thrifts and 97 percent of all credit 

unions industry wide. Typically, advances utilization rates are fairly consistent 

across asset size groups, though smaller institutions are currently funding a larger 

portion of their balance sheets with advances than larger institutions. Many of these 

smaller institutions have limited or no direct access to the capital markets other 

than through their FHLBank. 

In addition to depository institutions, over 250 insurance companies are now 

members of an FHLBank. Insurance companies are a significant part of the System, 

representing almost 13 percent of outstanding advances. These members play an 

important role in the housing market by holding substantial amounts of single and 

multifamily mortgages and agency debt. Many insurance company members are also 

active participants in the Affordable Housing Program (AHP) and the Community 

Investment Program (CIP) as an extension of their involvement in economic development activities. 

The mortgage finance and community lending industry is broad and varied. This 

variety is crucial to both financial innovation and the diversification of risk across 

institutions of differing size, geography, charter, and business model. By providing 

equal access to liquidity, the System supports the current structure of the industry 

and this structure can be a source of stability and strength moving forward. As Congress looks to restructure the housing finance system in this country, all member 

types of the FHLBank System will have an important role to play in meeting the 

Nation’s housing finance needs. 

Dependable Access to a Deep, Liquid Market for FHLBank Debt 

The market for FHLBank debt is one of the most liquid. To the end investor, this 

liquidity represents an appealing characteristic. Collectively, the FHLBanks issue 

debt in significant volume on a daily basis. The size, frequency, and consistency of 

issuance mean that it takes less time for the market to absorb new issues during 

both normal and stressed markets. In turn, this makes it profitable for dealers to 

allocate capital against FHLBank underwriting and trading. Greater capital allocations, in turn, mean greater liquidity in the market. 

This liquidity enables the FHLBanks to fund at attractive levels across a host of 

terms and structures. In turn, they pass this advantage on to their members. All 

members receive the benefit of attractive funding, regardless of their size. Because 

advances are made at relatively narrow spreads to borrowing costs, attractive 

issuance levels for FHLBank debt translates directly into lower advance rates for 

49 

members. In turn, these members are able to pass these benefits on to their communities in the form of affordable credit. 

Another benefit of the depth and liquidity of the market for FHLBank debt is that 

the System is able to rapidly scale up its issuance with member demand for advances. The FHLBank debt franchise is well recognized and highly desired by a host 

of global investors due to its liquidity and credit quality. During 2008 and 2009, 

against a dislocated bond market, the System was able to increase debt outstanding 

by $365 billion over 14 months. This added funding provided a lifeline to financial 

institutions across the country. It is because of the depth and liquidity of the 

FHLBank debt market that the System is able to tap the markets in size when demand surges—even during extreme distress. 

Advances and Member Services 

Members use advances to fund new originations and existing portfolios of mortgages, to purchase mortgage-backed securities, and to manage the substantial interest rate risk associated with holding mortgages in portfolio. Some members layer 

in term advances alongside their deposits, altering the duration profile of their liabilities to better suit their assets and mitigate risk. Other members use shorterterm, on-demand liquidity to offset unexpected deposit runoff or to take advantage 

of an opportunity to quickly add assets. By enabling members to effectively manage 

their balance sheets, advances lower the cost of extending credit to American consumers. 

In accordance with statutory requirements, all advances are secured by eligible 

collateral and the purchase of capital stock. When FHLBanks issue advances, they 

lend against both the credit of the member-borrower and the quality of the collateral. Each FHLBank establishes its own processes and procedures for assessing the 

credit worthiness of borrowers and the appropriate lending value of pledged collateral. FHLBanks regularly monitor actual and potential borrowers’ financial condition to ensure appropriate credit actions have been taken to protect the FHLBank 

against any potential loss arising from any extension of credit. In addition to evaluating members’ financial reports, FHLBanks also monitor macroeconomic trends 

and local laws and regulations, and regularly interact with the member’s management teams to ensure they stay attuned to the member’s financial condition. 

Each FHLBank establishes the types of assets that will be accepted as eligible 

collateral, defines the specific underwriting requirements and identifies the lendable 

value that will be applied to each eligible asset. Collateral practices vary among the 

FHLBanks with regional differences accounting for some of the differences. For example, some districts are dominated by larger commercial banks where others are 

primarily served by community financial institutions. Some markets display a concentration of loans exceeding the conforming loan limits, where others are well within the limits. On the coasts, there is a higher concentration of commercial real estate lending, and in the midwest some institutions specialize in agricultural lending. 

Based on these regional differences and the risk appetite of each FHLBank, collateral practices will vary. Examples of these variations include, but are not limited 

to, the types of assets accepted as eligible collateral, the specific underwriting requirements applied to each asset class, the member’s collateral reporting requirements, pricing techniques, and on-site collateral reviews. 

The valuation and management of member collateral is a process that relies on 

regional expertise and market knowledge. During a time when many institutions attempted to streamline or outsource credit underwriting and collateral evaluation 

processes, the FHLBanks stuck to the basics and combined conservative collateral 

valuation practices with effective credit policies. The System has an impressive 

track record as a result. 

Beyond assessments and risk management, FHLBanks provide a variety of member services, such as correspondent services that leverage local knowledge to deliver 

value. While these services vary across the System, it is clear that the strong relationships between FHLBanks and their members are mutually beneficial and integral to the strength of each cooperative. 

FHLBank Mortgage Programs 

The System has an excellent track record of working with members to manage 

risk in the mortgage purchase programs that some FHLBanks have administered 

for over 16 years. In these programs, a participating FHLBank purchases traditional conventional single-family mortgages originated by member institutions 

under a risk-sharing agreement between the FHLBank and the member. The 

FHLBanks essentially offer two different versions of mortgage purchase programs. 

The Mortgage Partnership Finance (MPF) Program generally involves the selling 

member providing a credit enhancement to the FHLBank that can be called upon 

50 

if the performance of the pool of loans sold incurs losses above a certain level. The 

FHLBank of Chicago created the program and administers many aspects of the program for participating FHLBanks. Another MPF variation allows members to sell 

their loans through their FHLBank to Fannie Mae, although without any risk sharing obligation. The other program is the Mortgage Purchase Program offered by a 

few FHLBanks that essentially involves the creation of a reserve account against 

the pool of loans sold by the member that is paid out to the member over time depending on the loss experience of the pool. 

The collective portfolio of mortgage loans held by the FHLBanks in both programs 

carries a 1.94 percent seriously delinquent rate in comparison to a 6.16 percent seriously delinquent rate for all conventional loans nationwide. Total actual credit 

losses from mortgages held in portfolio since the program’s inception in 1997 have 

been less than 5 basis points of the average portfolio balances annually. 

These programs are an example of the success that can be achieved from ‘‘skinin-the-game’’ mortgage partnerships. Community bankers exemplify ‘‘skin-in-thegame’’ business principles on a daily basis—their success is dependent upon being 

fully invested in the success and survival of the communities that they serve. Prudent underwriting, adequate appraisals, and the provision of appropriate credit 

products that suit an individual borrower’s needs are fundamental operating principles for community bankers. 

The FHLBank of Topeka offers the Mortgage Partnership Finance (MPF) Program. The MPF program is critically important to supporting our housing finance 

and community and economic development mission and is especially important for 

our community financial institution members. The district that we serve is comprised of smaller and more rural communities where agriculture is a leading economic force. With a total population of 13.7 million, we are the smallest of the 

FHLBank districts. The median size of our counties is much smaller than the median size of counties across the U.S. 

Our MPF program is focused on serving community financial institutions and providing a reliable secondary market conduit for them. Ninety-three percent of the 

current MPF balances have been aggregated from community financial institutions 

with total assets of approximately $1 billion or less. Since inception, over 240 members have sold loans to the FHLBank of Topeka using the MPF program. The portfolio is broadly distributed with the largest concentration held by a single participating member at 6 percent, with the next largest concentrations at just over 2 percent. The average size of a participating member’s mortgage loans in our MPF portfolio is approximately $24 million. Our MPF program is broadly representative of 

our financial institutions and the local communities that they serve. 

The fundamental MPF concept—that the actual lender making the credit decision 

should retain ‘‘skin in the game’’ will drive better credit performance in mortgage 

portfolios—has a proven successful track record. This concept of lender retained risk 

has been at the forefront of the mortgage finance reform debate. Congress and regulators need only look to the FHLBanks’ mortgage programs to see the concept in 

action. Our MPF portfolio of mortgage loans carries a 0.4 percent seriously delinquent rate in comparison to a 6.16 percent seriously delinquent rate for all conventional loans nationwide. Since inception, annual credit losses on our MPF program 

have not exceeded 2 basis points of the average portfolio balances. 

The FHLBank mortgage programs have been highly successful in adding value to 

members through product innovation and service. At a time when other secondary 

market participants are consolidating their services, increasing delivery and guarantee fees and imposing surcharges on low volume lenders (or providing high volume lenders with discounts), members have recognized that they can rely on their 

FHLBank to meet their secondary market needs. The mortgage purchase programs 

allow community financial institutions to be competitive with larger financial institutions and mortgage lenders and to remain active housing lenders within their 

communities. 

Housing and Community Lending Programs 

For more than 20 years, the FHLBanks’ Affordable Housing Program (AHP) has 

been one of the largest private sources of grant funds for affordable housing in the 

United States. It is funded with 10 percent of the FHLBanks’ net income each year. 

These grant funds are distributed through a competitive process to projects developed through partnerships of member institutions and local developers and housing 

organizations. AHP grants subsidize the cost of owner-occupied housing for individuals and families with incomes at or below 80 percent of the area median income 

(AMI), and rental housing in which at least 20 percent of the units are reserved for 

households with incomes at or below 50 percent of AMI. The subsidy may be in the 

form of a grant or a below-cost or subsidized interest rate on an advance. AHP funds 

51 

are primarily available through a competitive application program at each of the 

FHLBanks. AHP funds are also awarded through a home ownership set-aside program to assist low and moderate income households in purchasing homes, with at 

least one-third of the funds being used to assist first-time homebuyers. The AHP 

allows for and encourages funds to be used in combination with other programs and 

funding sources, such as the Low-Income Housing Tax Credit. These projects serve 

a wide range of neighborhood needs: many are designed for seniors, the disabled, 

homeless families, first-time homeowners and others with limited resources. As of 

year end 2012, more than 806,000 housing units have been built using AHP funds, 

including 490,000 units for very low-income residents. The total AHP dollars awarded from 1990 through 2012 is approximately $4.8 billion. 

Each Federal Home Loan Bank also operates a Community Investment Program 

(CIP) that offers below-market-rate loans to members for long-term financing for 

housing and economic development that benefits low- and moderate-income families 

and neighborhoods. Members use CIP advances to fund the purchase, construction, 

rehabilitation, refinancing, or predevelopment financing of owner-occupied and rental housing for households with incomes at or below 115 percent of AMI. The program is designed to be a catalyst for economic development since it supports projects 

that create and preserve jobs and help build infrastructure to support growth. Lenders have used CIP to fund owner-occupied and rental housing, and to construct 

roads, bridges, and sewage treatment plants as well as to provide small business 

loans. From 1990 to 2012, the FHLBanks’ CIPs have lent over $68 billion for a variety of projects, resulting in 771,000 housing units. 

The FHLBanks’ Community Investment Cash Advance (CICA) programs offer 

funding, often at below-market interest rates and for long terms, for members to use 

to provide financing for projects that are targeted to certain economic development 

activities. These include commercial, industrial, manufacturing, and social services 

projects, infrastructure, and public facilities and services. CICA lending is targeted 

to specific beneficiaries, including small businesses, and households at specified income levels. 

I would like to take some time to inform you about some of the programs and 

initiatives that my bank, the FHLBank of Topeka, has undertaken on behalf of our 

members, particularly our smaller members, to help them serve the lending and 

credit needs of their communities. 

The AHP supports our housing finance mission by providing subsidies to its members for the provision of affordable owner-occupied and rental housing to very low- 

, low-, and moderate-income households. More than 33,000 housing units have been 

built using AHP funds and more than $145 million have been awarded through our 

competitive program. 

In addition to the competitive application program, AHP funds are also awarded 

through the home ownership set-aside program. Under this program, an FHLBank 

may set aside up to the greater of $4.5 million or 35 percent of its AHP funds each 

year to assist low- and moderate-income households purchase homes. Our members 

obtain the AHP set-aside funds and then use them as grants to eligible households. 

The FHLBank of Topeka’s set-aside is geared to our smaller, community-based 

members. We limit the amount of funds each member may use annually and we restrict the use of the funds to the purchase of homes only in nonurban areas of our 

district. Since the program’s inception in 1995, participating members have used 

just over $28 million to assist 7,255 households purchase homes. 

FHLBank members are able to obtain advances (loans) through the Community 

Investment Program (CIP) and Community Investment Cash Advances (CICA) programs. For ease of our member’s use, the FHLBank of Topeka has separated the 

housing and economic development portions of these programs into our Community 

Housing Program (CHP) and Community Development Program (CDP). Advances 

taken through CHP and CDP are priced below our normal interest rates and may 

be for longer terms, allowing our members to provide financing for projects that are 

targeted to housing or economic development activities at fixed rates. 

Throughout our district, members have used CDP to match fund loans or pools 

of loans to their customers for a variety of activities, including: commercial real estate, small business lending, farm real estate, and a variety of agricultural credit 

needs. Members meet the commercial lending needs in their communities by: 

• Match funding loans for single projects on a case-by-case basis 

• Funding a group of eligible loans as a pool 

• Funding loan participations 

52 

Since 1999, our members have been approved for nearly $2.2 billion in CDP 

funds, financing more than 1,700 projects involving the creation or retention of 

4,500 jobs. 

Corporate Governance 

Congress established a unique ownership and governance structure for the 

FHLBanks, which has served the FHLBanks well in the past and continues to do 

so today. A critical feature of this structure is that the FHLBanks are wholly owned 

by their members/customers so each FHLBank’s interests are simultaneously 

aligned with those of its members and customers. In addition, the boards of directors of the FHLBanks are independent of management. No member of management 

may serve as a director of an FHLBank. 

The Federal Home Loan Bank Act provides that a majority of each FHLBank’s 

directors must be elected by its member financial institutions from among officers 

and directors of those institutions. Members vote for directors representing member 

institutions from their States. At least two-fifths of the directors must be independent (nonmember) directors. The HERA Act of 2008 altered the governance 

structure of the FHLBanks to provide for the election of independent directors by 

the FHLBanks’ members, rather than their appointment by the regulator. HERA 

also required that at least two of each FHLBank’s independent directors must represent the ‘‘public interest’’ by having more than 4 years of experience in representing consumer or community interests on banking services, credit needs, housing, or financial consumer protection. The remaining independent directors must 

have demonstrated knowledge or experience in financial management, auditing and 

accounting, risk management practices, derivatives, project development, organizational management, or such other expertise as the FHFA Director provides by regulation. 

The Federal Home Loan Bank Act also provides that no member may cast a number of votes in the election of directors greater than the average number of required 

shares held by members in its specific State. This prevents large members holding 

relatively large amounts of an FHLBank’s capital stock from dominating director 

elections and, in practice, means that the majority of each FHLBank’s member directors generally represent the small institutions that make up the great majority 

of members. 

The statutory framework that controls the composition of the FHLBanks’ boards 

of directors ensures that each FHLBank’s board of directors will have a balance of 

interests represented. With no members of management on the board of directors, 

directors are in a position to independently oversee management actions. The members that contribute capital and benefit from the FHLBank’s products and services 

are assured a majority of the directors. The director election voting preferences for 

small members ensure that larger members cannot dominate the board of directors 

and that an FHLBank’s policies will not be detrimental to small members. Finally, 

the large contingent of independent directors ensures that the FHLBanks will benefit from perspectives and expertise independent of the membership. 

Risk Management 

The Federal Home Loan Banks are highly regulated entities, subject to regulation 

and supervision by the Federal Housing Finance Agency (FHFA). 

As 12 independent institutions, each FHLBank is responsible for appropriately developing and implementing its own risk management activities. The cooperative 

structure of the FHLBanks eliminates many of the incentives a publicly traded company might have to raise its risk profile, and in fact discourages FHLBanks from 

taking excessive risk. Just as FHLBank members do not expect equity investment 

returns on their capital stock investments in an FHLBank, they also do not expect 

equity investment risk in that investment. Members purchase FHLBank capital 

stock in order to obtain access to FHLBank funding products, and must maintain 

capital stock investments in the FHLBank as long as they continue to be members. 

Members provide the capital that supports their advance transactions with the 

FHLBanks. In this environment, members expect stability, reliability and consistency of returns and credit product pricing. These member expectations are reflected 

in the oversight provided by each FHLBank’s board of directors, a majority of which 

is comprised of directors representing member institutions. 

Through a rigorous process, each FHLBank continually manages the pool of collateral backing an advance. This includes frequent monitoring of performance, pricing, and valuation. Members are required to maintain a sufficient pool of performing 

collateral, so they regularly replace delinquent loans and add collateral based on 

changes in haircuts and valuations. These precautions ensure sufficient 

overcollateralization at all times. 

53 

When an FHLBank lends to a troubled member, it does so in consultation with 

that member’s primary regulator. In the event that the member subsequently becomes insolvent, this process enables the FDIC to minimize losses to the Deposit 

Insurance Fund. In a liquidation scenario, the FDIC typically pays off outstanding 

advances in exchange for the timely release of collateral in an attempt to maximize 

the resolution value of the institution. Should the FDIC opt out of this arrangement, 

the FHLBank can liquidate the collateral to pay off any advances. 

For an FHLBank to take a loss on an advance the liquidation value of a member’s 

pledged assets plus the member’s investment in FHLBank stock would have to be 

less than the outstanding advance plus prepayment fees (the fair value of the advance). This is extremely unlikely—since the establishment of the System in 1932, 

no FHLBank has taken a credit loss on an advance. In the event that collateral was 

insufficient to cover a defaulting member’s borrowings, the next line of defense to 

FHLBank shareholders would be the failed member’s investment in capital stock. 

This capital is proportional to either the size of the member (asset-based stock purchase requirement) or to the outstanding balance of advances (activity-based stock 

purchase requirement, which increases along with activity). It is hard to envision 

a situation in which a member would lose its capital investment in an FHLBank 

due to the failure of another member. 

From the vantage point of debt investors and taxpayers, the FHLBanks’ joint and 

several liability structure provides additional insulation from any loss that might 

occur at an individual FHLBank. Even if an FHLBank suffers losses, the aggregate 

amount of capital stock and retained earnings on the balance sheet of the 12 

FHLBanks, collectively, would provide a deep layer of insulation from losses. The 

combination of the FHLBanks’ cooperative structure and the multiple layers of risk 

mitigation provide an abundance of private capital to buffer bondholders and taxpayers from potential losses. 

Financial Condition 

The FHLBank System reported net income of $2.6 billion in 2012, up from $1.6 

billion in 2011, making 2012 the most profitable year since 2007. For the third consecutive year, all 12 FHLBanks were profitable. As a result of this profitability, the 

FHLBanks have been able to continue building their retained earnings. As of YE 

2012 retained earnings were at $10.5 billion, having grown 250 percent since 2008 

as the FHLBanks prudently strengthened this component of capital as a risk 

mitigant. Having completed their statutory obligation in 2011 under the Federal 

Home Loan Bank Act to make payments related to the Resolution Funding Corporation, all of the FHLBanks have entered into a Joint Capital Enhancement Agreement to further strengthen their financial soundness. Under this agreement, each 

FHLBank, on a quarterly basis, allocates 20 percent of its net income to a separate 

restricted retained earnings account established by that FHLBank. These restricted 

retained earnings accounts cannot be used to pay dividends to members and continue to build at each FHLBank until they are equal to one percent of that 

FHLBank’s total outstanding consolidated obligations. 

Role of Community Financial Institutions in the Housing and Mortgage Finance Market 

Community financial institutions remain significant players in housing finance, 

notwithstanding the continuing pace of greater concentration being observed in both 

mortgage originations and servicing. The core strength community financial institutions bring to the market is their deep knowledge of local markets and their personal relationship with customers. In smaller communities and in rural markets, 

community financial institutions are often the sole source of mortgage credit as larger institutions focus on more populated areas. 

While not having the dominant share of mortgage originations, community financial institutions originate a significant amount of mortgage loans. As shown in the 

table below, during the first quarter of 2013, $435 billion of mortgages were originated. Community banks and thrifts with less than $10 billion in total assets originated $55 billion of residential mortgage loans during the first quarter of 2013. 

54 

Community financial institutions play an important role as an investor in mortgage loans and mortgage-backed securities. As portfolio lenders, community financial institutions invest in mortgage loans originated in their local markets. Some institutions have had success holding in portfolio both conforming and nonconforming 

mortgages. Other lenders have developed a strategy of holding nonconforming mortgages and selling conforming mortgages. Nonconforming mortgages, whether because they exceed the conforming limit (jumbos) or because they do not meet all of 

the underwriting criteria of the agencies, still can be well underwritten and of high 

quality. There are occasions where a lender may need to make an accommodation 

in underwriting the loan such that it does not qualify under the secondary market 

rules. When this occurs, the ability of these loans to be placed into the lender’s portfolio ensures a broader section of the community has access to home loans. 

U.S. banks and thrifts held $2.4 trillion in residential mortgage loans on their 

books at March 31, 2013. Of the $2.4 trillion 43 percent was held by smaller financial institutions. 

Community financial institutions also play a significant role in supporting liquidity in the mortgage-backed securities market through purchases of MBS securities. 

As of March 31, 2013, banks and thrifts held $1.7 trillion on their balance sheet 

with smaller financial institutions holding approximately $0.8 trillion. Community 

banks and thrifts with total assets of less than $10 billion held $0.3 trillion of these 

mortgage-backed securities. 

Community financial institutions often prefer to retain servicing of their mortgage 

originations, including those sold into the secondary market. The primary reason is 

to maintain the personal customer relationship between the community financial institution and their customers. While the mortgage servicing industry has undergone 

significant consolidation over the past decades, community financial institutions 

continue to strive to maintain high quality and cost effective servicing for their customers. As of March 31, 2013, the top ten mortgage servicers serviced $6.2 trillion 

of residential mortgages, or 79 percent of the total and the remainder—primarily 

community financial institutions—serviced $1.7 billion, or 21 percent of the total. 

Community financial institutions maintain a disciplined approach to managing 

risks, including risks on their balance sheet. As such, community financial institutions will have limits as to the levels of fixed-rate residential mortgage loans that 

they desire to carry on their balance sheet. Therefore, it is not uncommon that these 

financial institutions need to sell off portions of their new mortgage loan originations into the secondary market. During the first quarter of 2013, small financial 

institutions and mortgage lenders sold $78 billion to Fannie Mae and Freddie Mac. 


72313004.eps
55 

Community Financial Institution Challenges in Mortgage Finance and the 

Secondary Market 

Community financial institutions have always played a critical role in housing 

and mortgage finance in support of their local communities. But today they face 

enormous challenges and uncertainty. 

The FHLBanks are currently conducting a survey of our members to determine 

the issues that are impacting their mortgage business and what role they would like 

the FHLBanks to play in support of their mortgage activities moving forward. Some 

of the initial results would indicate a high level of uncertainty regarding their ability to continue to profitably make residential mortgages. 

Much of the concern relates to new rules around qualified mortgages and the capital requirements under the new Basel III rules. Although some of these proposed 

rules were recently finalized with changes favorable to community financial institutions, there continues to be a high level of concern with the time, attention, resources and costs needed to comply. 

One favorable change in Basel III relates to risk-based capital (RBC) rules for 

credit enhancements that would impact the credit enhancement members provide 

under the MPF Program. During the Program’s nearly 16 plus year history, the 

RBC rules have been somewhat punitive given the superior credit performance of 

the loans as the rules did not seem to fully account for the credit structure supporting the loans or the FHLBank’s first loss account (FLA) designed to cover normal and expected losses. The newly adopted Basel III rules more appropriately account for the FLA and provide a much better result in terms of required RBC. We 

hope that members would be given the option to apply this treatment earlier than 

the implementation date of Basel III. At the same time, however, the formulas applied to the credit structure are relatively complicated and our members will require 

education and assistance to comply with the new rules and calculations. 

Increased regulation—combined with the possibility that larger financial institutions will have an increased aggregation role moving forward—is very troubling to 

our members. Our members value the ability to underwrite the mortgages made in 

their communities and to continue to service the loans. Both of which would be 

greatly diminished if selling to larger aggregators or securitization sponsors is the 

only path to the secondary markets in the future. 

Freddie Mac recently announced their intent to charge a $7,500 fee to originators 

with less than $5 million in annual business—many of which would be communitybased financial institutions. In 2012, approximately 40 percent of the FHLBank of 

Topeka’s participating members sold less than $5 million into our MPF Program. 

While Freddie Mac subsequently rescinded their low activity fee, we believe that 

this illustrates how a large aggregator may work with small community-based institutions. 


72313005.eps
56 

There are other challenges created by new and proposed regulations governing 

mortgage servicing and mortgage loan originations that will add to the cost and 

complexity of regulatory compliance. While there has been much discussion on finding ways to reduce this burden on community financial institutions, more needs to 

be done. 

FHLBank Support of Mortgage Lenders 

The FHLBanks play a variety of important roles in supporting community financial institutions in their role of financing homes. 

Our community financial institutions use advances from the FHLBanks in a variety of ways. On a broad level, the FHLBanks provide a key supplement to the deposit funding institutions primarily rely on. Today, community financial institutions 

are experiencing strong deposit growth, but this is not typical. When businesses and 

communities are growing, community financial institutions experience strong loan 

demand. Meeting that loan demand just from deposits is generally not an option 

and that is when community financial institutions rely on their FHLBanks to provide additional funding. 

For portfolio lenders, it is important to manage the interest rate risk involved in 

longer-term fixed-rate loans. The FHLBanks offer a variety of advance products to 

meet the needs of those lenders. Members can obtain long-term fixed-rate funding 

to match the mortgages held in portfolio. Amortizing advances are available that 

can be matched to a portfolio of mortgages the member holds. Advances are available that allow the member the option to prepay the advance without fee to match 

the convexity of the member’s mortgage portfolio. The FHLBanks also provide technical assistance to members in understanding how to quantify and manage the interest rate risk from a portfolio of fixed-rate loans. When a community financial institution sells to other institutions, FHLBanks will provide warehouse lending, funding the loan between the time the loan is closed and the loan is sold. 

We support their secondary market needs through our MPF and MPP programs 

when they have loan originations that they do not wish to hold in their portfolios. 

Our MPF and MPP program’s premise rests on the simple, yet powerful, idea that 

by combining the credit expertise of a local lender with the funding and hedging 

advantages of the FHLBanks, a stronger, and more economical and efficient method 

of financing residential mortgages would result. These mortgage programs give 

mortgage lenders the best options of mortgage lending—lenders retain the credit 

risk in their loans and transfer the interest rate and prepayment risks to the 

FHLBank. Participating financial institutions are able to preserve their customer 

relationships and are paid to manage the credit risk of their customers. These programs charge no lender surcharges—allowing smaller community financial institutions equitable access and the ability to more effectively compete in the mortgage 

finance market against their larger competitors. 

A majority of community banks, thrifts, and credit unions participating in the 

mortgage programs hold approximately $1 billion or less in total assets and are 

more comfortable dealing with their FHLBank than selling directly to Fannie Mae. 

These members already have a relationship with their FHLBank and obtain better 

pricing through the FHLBanks. Small banks, thrifts, and credit unions do not have 

sufficient volumes to qualify for discounts on guarantee fees charged by Fannie Mae 

to protect against credit losses. The volume pricing available to the FHLBanks and 

passed on to small community financial institutions is a huge benefit that allows 

them to compete on rates against larger financial institutions and mortgage lenders. 

The MPF program also allows small banks, thrifts, and credit unions to retain mortgage servicing and maintain more control over the customer relationship. Community lenders can retain servicing or can work with the servicers approved for the 

program. 

Some of the FHLBanks offer a product called MPF Xtra. Through MPF Xtra, 

mortgage loans are aggregated through FHLBanks and sold to Fannie Mae. This 

service complements our other mortgage programs. More notably, the program provides a crucial service to community financial institution members that want to continue to make home loans. For our members that want 30-year fixed-rate mortgages 

to be available at a competitive price, our role as an aggregator and our price point 

compare favorably with selling directly to Fannie Mae. 

There are numerous other ways in which community financial institutions and 

the FHLBanks partner to serve their communities. From providing letters of credit 

for securing public unit deposits to providing direct grants to support low- to moderate-income housing, the FHLBanks partner with community financial institutions 

to serve the public. 

57 

S.1217—the ‘‘Housing Finance Reform and Taxpayer Protection Act of 2013’’ 

The Council welcomes the opportunity to share with you our views on housing finance reform generally, and more specifically our views on the recently introduced 

bill S.1217—the ‘‘Housing Finance Reform and Taxpayer Protection Act of 2013’’. 

We commend you for your extensive efforts in working to achieve a sustainable 

housing finance system for the future that does not expose the taxpayer to unnecessary risk. 

The Council believes that the FHLBanks have a critical role to play in serving 

their members in the housing finance system of the future. The unique characteristics of the FHLBank System that have made it possible for the FHLBanks to carry 

out their mission of serving their members and their communities (their regional, 

scalable, self-capitalizing, cooperative structure; broad participation by a diverse 

membership; and dependable access to a deep, liquid market for FHLBank debt) 

should be maintained in a future housing finance system. The FHLBanks have demonstrated their role as a safe and reliable provider of liquidity throughout the recent 

financial crisis, and their regional, self-capitalizing, cooperative structure will enable 

them to serve their members’ needs in a safe and sound manner in a future housing 

finance system. 

We are pleased that S.1217 recognizes the importance of maintaining a role for 

institutions of all sizes in the housing finance system of the future, and contains 

provisions intended to preserve equal and reliable secondary market access for small 

and midsize community financial institutions to help maintain reliable access to 

mortgage credit throughout all parts of the country. We appreciate that the bill provides different options for the FHLBanks to serve their members as the housing finance system of the future evolves. With the support and guidance of our members, 

we are open to exploring opportunities to expand our support of community lenders. 

At the same time, we emphasize the paramount importance of maintaining and protecting our continuing role as a reliable source of liquidity for our members. 

We look forward to working with you and your members as the legislative process 

moves forward. 

Conclusion 

Over their long history, the FHLBanks have played a critical role in supporting 

their member financial institutions’ ability to meet the housing finance and credit 

needs of their local communities in all economic cycles and in all parts of the United 

States. The FHLBank cooperative model performed exceptionally well throughout 

one of the worst financial crisis in this Nation’s history, without requiring any taxpayer assistance. The FHLBanks remain economically strong today and continue to 

serve a vital function for their financial institution members and the communities 

they serve. 

Chairman Tester, Ranking Member Johanns, and Members of the Subcommittee, 

thank you for the opportunity to appear before you today to discuss the FHLBanks 

and housing finance reform. I would be happy to answer any questions you have. 

PREPARED STATEMENT OF MICHAEL MIDDLETON 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, COMMUNITY BANK OF TRI-COUNTY, 

WALDORF, MARYLAND, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

JULY 23, 2013 

Chairman Tester, Ranking Member Johanns, my name is Michael Middleton, 

Chairman and Chief Executive Officer of the Community Bank of Tri-County in 

Waldorf, Maryland. I appreciate the opportunity to be here to represent the American Bankers Association (ABA) and present our views regarding reforming the Government’s role in secondary mortgage markets. ABA represents banks of all sizes 

and charters and is the voice for the Nation’s $14 trillion banking industry and its 

two million employees. 

The ABA commends Senators Corker, Warner, Tester, Johanns, Hagan, 

Heitkamp, Heller, and Moran on the introduction of the Housing Finance Reform 

and Taxpayer Protection Act (S.1217) to address the Federal Government’s role in 

the mortgage market and resolve the longstanding conservatorship of Fannie Mae 

and Freddie Mac. 

This bipartisan legislation is a positive first step in what is certain to be a long 

process toward creating a sustainable, rational, and limited role for the Federal 

Government in supporting and regulating a mortgage market that is appropriately 

and predominately filled by the private sector. The bill follows principles long advoVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
58 

cated by the ABA, and builds upon the framework detailed by the Bi-Partisan Policy 

Center’s Housing Commission, on which ABA’s CEO, Frank Keating, served. 

S.1217 creates the Federal Mortgage Insurance Corporation (FMIC) which would 

serve as a public guarantor of eligible mortgages and a regulator of the issuers, 

aggregators and credit enhancers involved in a revised secondary market. The approach taken with the FMIC addresses a number of key concerns with the Government’s role in the housing finance markets. It provides a set of incentives to shrink 

the Government’s involvement, while establishing the structure for a liquid and private market. 

We would also note that to fully protect taxpayers from additional losses like 

those suffered by Fannie Mae and Freddie Mac during the financial crisis, it will 

be necessary to impose similar reforms on the Farm Credit System, which continues 

to follow the discredited model of privatized gains and public losses which failed so 

badly in the housing sector. Without similar reforms to the Farm Credit System, 

it is only a matter of time until taxpayers again are put at risk. 

The task ahead will not be easy. The mortgage market is a complex and intricate 

part of our Nation’s economy that touches the lives of nearly every American household. Fannie Mae, Freddie Mac, Farm Credit System, and the Federal Housing Administration currently constitute the bulk of available financing for the American 

mortgage market. It is, therefore, imperative that reform be done so as not to inflict 

further harm on an already fragile housing economy and, most importantly, does 

not inadvertently harm creditworthy Americans who want to own a home. Reform 

must be deliberate, as the current situation is not viable for the long term. Addressing the many concerns and interests of a wide range of participants will require 

much negotiation, compromise and cooperation. There is much work yet to be done, 

but this bill is a solid foundation on which to begin the process. 

In my statement today, I would like to make three key points: 

• S.1217 is consistent with principles long advocated by the ABA, and builds upon 

the framework for single-family housing finance detailed by the Bi-Partisan Policy Center’s Housing Commission; 

• S.1217 moves to facilitate the reduction of the Federal Government’s role in single-family housing finance; and 

• Although S.1217 addresses a number of key concerns with GSE reform, there 

remain a number of outstanding issues that must be addressed to ensure the 

viability of the new system and that the mortgage markets continue to function 

properly. 

I. S.1217 Is Consistent With Principles Long Advocated by the ABA 

ABA believes the Government’s role in housing finance must be dramatically reduced. It should be limited to ensuring access to the secondary market for lenders 

of all sizes and governmental agencies should not compete directly with the private 

market. This structure must provide for stability and accessibility of the capital 

markets in the event of a market failure. 

S.1217 is an important first step in addressing the role of the Federal Government in supporting and regulating mortgage markets. As Congress works to develop 

a consensus on broad reforms, ABA believes lawmakers should be guided by the following principles developed by the bankers serving on ABA’s GSE Policy and Federal Home Loan Bank Committees: 

1. The primary goal of any Government-sponsored enterprise (or a GSE successor) 

in the area of mortgage finance should be to provide stability and liquidity to 

the primary mortgage market for low- and moderate-income families. 

2. In return for the GSE (or a GSE successor) status and any benefits conveyed 

by that status, these entities must agree to support all segments of the primary market, as needed, in all economic environments. 

3. Strong regulation, examination, and authority for immediate corrective action 

of any future GSE must be a key element of reform. 

4. Any GSE or successor involved in the mortgage markets must be strictly confined to a well-defined and regulated secondary market role and should not be 

allowed to compete with the private, primary market. 

5. Any reform of the secondary mortgage market must consider the vital role 

played by the Federal Home Loan Banks and must in no way harm the traditional advance businesses of FHLBanks, their member’s access to advances or 

to its mission as it has been defined and refined by Congress over time. 

6. GSEs or successors must both be allowed to pursue reasonable risks, but the 

risk/reward equation must be transparent and more rigorously defined and regulated. 

59 

7. GSEs or successors must operate within a framework of market procedures 

and regulation governing the securitization of all mortgage assets. 

8. A better alternative to arbitrary ‘‘skin in the game’’ is the establishment of 

strong minimum regulatory standards to assure sound underwriting for all 

mortgages, regardless of whether they are sold or held. Comparable standards 

should be established for all loan originators with comparable levels of effective 

regulatory oversight. 

9. Accounting and regulatory changes should be developed to more appropriately 

reflect and align securitizations with underlying risks. True sales treatment 

and regulatory capital charges should appropriately reflect the reality of true 

risk-shifting activities, as well as balance sheet exposures. 

10. Affordable housing goals or efforts undertaken by the GSEs or successors 

should be delivered through and driven by the primary market, and should 

be structured in the form of affordable housing funds available to provide subsidies for affordable projects. GSEs or successors must provide for fair and equitable access to all primary market lenders selling into the secondary market. 

ABA has long maintained that the primary goal of any Government-sponsored enterprise in the area of mortgage finance should be to provide stability and liquidity 

to facilitate the ability of the primary mortgage market to provide credit for borrowers who have the credit and skill sets required to achieve and maintain home 

ownership. S.1217 would replace Fannie Mae and Freddie Mac with a new Federal 

guarantor, the Federal Mortgage Insurance Corporation (FMIC), modeled in part on 

the Federal Deposit Insurance Corporation (FDIC). 

The FMIC is designed to provide fully priced and fully paid Federal guarantees 

on securities backed by loans meeting specified requirements. By fully pricing the 

risks associated with insuring these mortgage loans, the legislation addresses a key 

shortcoming that has plagued the existing system and provides for the development 

of a private market. For too long, the guarantee fees (G fees), paid to insure loans 

backed by the current GSEs, were too low—the compensation being paid for what 

amounts to full Government backing was simply not priced correctly. 

Although the conservator of the GSEs, the Federal Housing Finance Agency 

(FHFA) has raised the G fee to encourage development of the private market, and 

to begin to repay the Government for its current support, more needs to be done 

both to protect taxpayers and to encourage the return of capital to the private market. G fees must be set high enough so that the private market will be able to price 

for risk in a fashion that allows for safe and sound investment and lending at a 

rate that is comparable (and eventually better) than the rate charged by the GSEs 

or any successor such as the FMIC. Such a structure also allows the FMIC tools 

to intervene if necessary in the event of crisis or market failure. 

Underwriting will also play an important role in the proposed FMIC. The FMIC 

will only cover eligible loans that meet strict underwriting requirements. In order 

to be eligible a loan must have at least a 20 percent downpayment as well as meeting Qualified Mortgage requirements. While we support this approach, we note that 

it does make it that much more essential for the Consumer Financial Protection Bureau to get the Qualified Mortgage rules right, and that banks be given the appropriate time needed to come into compliance with those rules. 

Another provision of this legislation is the lowering of the maximum loan limit 

for eligible single family mortgage loans to a more reasonable $417,000. The current 

maximum loan limit of $625,500 in high cost areas and $417,000 in all other regions 

is dramatically higher than necessary for the purchase of a moderately priced home, 

especially in light of housing price declines nationwide. While some high-cost areas 

persist (and a recovery of the housing market will entail a hoped for stabilization 

and recovery in home values), the conforming loan limits for most of the Nation 

should be reduced. This will assist the development of a private market for loans 

outside of the conforming loan limits as a step to a more fully private market for 

most loans. 

The legislation allows the Federal Home Loan Banks (FHLBs) to continue their 

existing mission, providing a key source of liquidity to our Nation’s banks, while 

also allowing for the FHLBs to act as aggregators and issuers of securities guaranteed by the FMIC. The FHLBs play a vital role in the mortgage markets and community economic development that must be protected. This plan preserves the traditional advance business of the FHLBs and access to advances by their members, 

particularly for community banks which play a vital role in providing mortgage finance and economic development. 

The bill would allow for a potential expansion of the role played by the FHLBs 

in housing finance if they choose to become aggregators and issuers for the FMIC. 

60 

In doing so, the FHLBs would be required to establish a new subsidiary, authorized 

by this bill, which would be separately capitalized from the existing FHLBs. The 

bill makes clear the intent that activities of any subsidiary are not part of the joint 

and several obligations applicable to the FHLB system. We support this intent and 

would like to work with the authors and the Committee to ensure that any necessary additional provisions to protect the existing FHLB system and its members 

which may be identified as the process continues are also incorporated. In particular, we emphasize that existing capital in the FHLB system is fully deployed, 

and as a general circumstance is a member asset that would not be available to capitalize new ventures. 

The bill also provides for the creation of a mutual entity to ensure small-lender 

access to the capital markets if such access were not available through another 

issuer, or through a Federal Home Loan Bank issuer. Small-lender access to the secondary market is of vital importance. In order for community banks to remain competitive, they must have access to the liquidity provided by the secondary market 

on an equitable basis regardless of size, location or market served. We applaud the 

attention the bill pays to this concern, though we note that capitalization of a new 

cooperative owned by small lenders may pose a challenge. We also note that many 

community banks also have existing relationships with larger institutions which 

may choose to become issuers under the bill’s provisions, while others engage in correspondent or other arrangements with larger institutions. FMIC is tasked with 

maintaining equitable access to the portals for smaller lenders. Preserving this multiplicity of access points will be important as the reform process evolves, and we 

want to work with the Committee to ensure that in establishing new structures and 

access points, existing relationships and mechanisms are not inadvertently harmed. 

Similarly, we note that the bill would ensure that existing debt already guaranteed by Fannie Mae and Freddie Mac benefits from the full faith and credit of the 

United States. Because of the trauma suffered by the financial markets and the borrowers they served during the recent financial crisis, it is important to move forward in a cautious and well-considered fashion. By ensuring that currently guaranteed mortgages remain covered, this plan would prevent an unexpected shock that 

could destabilize mortgage markets. 

II. S.1217 Would Reduce the Federal Government’s Role in Housing Finance 

ABA believes that the role of the Government in housing finance should be dramatically reduced from its current level and a private market for the vast majority 

of housing finance should be fostered. The Government’s role should be limited to 

well-targeted borrowers and covered loans and ensuring stability and accessibility 

of the capital markets in the event of market failure. The proposed FMIC intends 

to reduce governmental involvement and foster private sector financing—ensuring 

that financing can involve private sector banks of all sizes. Multiple sources of liquidity for private market lenders will lead to a more diverse and ultimately safer 

housing financing system. 

A well-regulated private market should be the desired financing source for the 

bulk of borrowers whose income and credit rating qualify them for conventional financing. Private markets function much more efficiently, better allocating the limited resources and credit. Additionally, a larger private market means fewer loans 

guaranteed by taxpayers, reducing the potential liability. 

As proposed, the FMIC’s role would be much more limited than the existing role 

of Fannie Mae and Freddie Mac. Currently, the GSEs undertake a wide set of mortgage market services, securitizing, bundling and issuing mortgage-backed securities. 

There is no reason for this function to be performed by a Government entity. By 

limiting the FMIC’s scope to simply insuring and regulating these markets, the bill 

creates the environment for a strong and healthy private market to perform the 

same function. And because the legislation requires participating private entities to 

take a first loss position ahead of any Government guarantee provided by the FMIC, 

it limits taxpayer exposure. 

The FMIC’s role would be two-fold. It would insure the smaller set of covered 

loans, ensuring a liquid and resilient housing finance market as well as the availability of credit. Also important, would be its role as regulator. The FMIC would 

replace the Federal Housing Finance Agency, regulating the players in the new 

housing finance market. Strong regulation, examination and authority for prompt 

corrective action are key elements of any reform proposal and which, if implemented 

correctly, will also help to reduce taxpayer liability. 

61 

III. A Number of Issues Must Be Addressed To Ensure Viability of the New 

System and To Allow Mortgage Markets To Function Properly 

This bill is an important step in the right direction. In order for it to accomplish 

its goal of a more limited governmental role while also ensuring that mortgage markets continue to function properly, a number of outstanding issues must be addressed. 

The First Loss and Capitalization Requirements Will Limit the Number of Private 

Entities Participating in Securitizations 

A key concern is the ability of private sector entities to participate in the activities 

given the capital requirements set forth in the bill. Although the bill allows private 

entities to participate in the securitization, bundling and issuing of mortgage-backed 

securities, doing so requires a separately capitalized entity. These entities are required to have capital sufficient to cover any losses and are required to maintain 

a first loss position of not less than 10 percent of the face value of any covered security. At a time when the financial services industry is being asked to raise capital 

levels, it will likely be difficult, if not infeasible, for many potential participants to 

fund these separately capitalized entities and, thus, to participate. 

Presently, a host of new banking regulations are coming into effect including 

Basel III and new leverage requirements—requiring banks to raise capital levels. 

ABA fears that few, if any, financial services institutions will have the free capital 

to fund a separately capitalized entity to undertake the securitization activities with 

the first loss positions required under the bill, particularly when other capital requirements are taken into consideration. Potentially, only a handful of large banks 

and other institutions with significant access to capital markets may be able to participate. This will only serve to further concentrate the industry. As previously 

noted, we also have similar concerns about the Federal Home Loan Banks’ and the 

proposed mutual entity’s ability to capitalize sufficiently to meet the bill’s requirements. This concern would extend to the other credit enhancers such as mortgage 

insurers and guarantors encompassed by the bill. 

ABA supports the overall structure envisioned by the bill with the FMIC acting 

as a guarantor, and private entities acting as aggregators, issuers and credit 

enhancers, but we believe further work is needed in setting the appropriate level 

of first loss and capitalization required of these entities. 

The FMIC Should not Serve as the Regulator for the Federal Home Loan Banks 

ABA also has concerns with tasking the FMIC with the regulation of the Federal 

Home Loan Bank System. While it is logical and prudent to have the FMIC regulate 

approved issuers under the new system, including any subsidiary of the Federal 

Home Loan Banks that serves as an issuer, we fear that having the FMIC regulate 

the entire FHLB System will create potential conflicts of interest that may harm 

the System and its members. Essentially the FMIC and its regulated entities will 

serve as a replacement for Fannie Mae and Freddie Mac. The Federal Home Loan 

Banks will continue in their traditional role, which means that they will function 

as a counterpart and, in some respect, competitive alternative to the FMIC. It is 

ill-advised to have one competitor regulate another. For this reason, we strongly 

urge that an alternative structure be considered for the regulation of the Federal 

Home Loan Banks in carrying out their traditional mission. One potential alternative is to keep that function as part of an ongoing single purpose Federal Housing 

Finance Agency. 

A More Thorough Examination Is Needed on the FMIC’s Role in Multifamily Housing Finance 

Although this bill moves to reform most aspects of the Government’s involvement 

in housing finance markets, it would retain a large role for the FMIC in multifamily 

finance. Currently Fannie Mae and Freddie Mac play an outsized role in the finance 

of multifamily real estate. This bill does little to change that, other than to transfer 

existing authorities and activities from the GSEs to the FMIC. We believe that a 

more thorough examination is needed regarding the proper role of the Government 

in the multifamily finance market, and that additional legislation may be needed 

to more appropriately reform the multifamily housing market and the role played 

by the Federal Government in multifamily finance. 

Conclusion 

S.1217 provides an important first step towards creating a sustainable, rational 

and limited role for the Federal Government in supporting and regulating a healthy 

mortgage market provided predominantly by the private sector. The mortgage market is an important part of our Nation’s GDP, which touches the lives of nearly 

62 

every American family. As such it is important that these reforms are carefully considered, so as to ensure the continued functioning of the labor market. 

We emphasize our caution that Congress be deliberate and reasoned in crafting 

such a monumental endeavor to avoid any disruptions of the nascent housing market recovery which would materially impact the Nation’s broader economic recovery. 

ABA commends the authors of this legislation for approaching this difficult issue 

in a manner that encourages discussion and moves to the establishment of a healthy 

private mortgage market. The ABA stands ready to work with the authors and the 

entire Congress to achieve such ends. 

63 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY THE COMMUNITY HOME LENDERS 

ASSOCIATION 

The Community Home Lenders Association is pleased to submit this written 

statement to the Senate Banking Committee on this hearing which focuses on the 

importance of ensuring that consumers have access through smaller community 

lenders to affordable mortgage loans under a reformed housing finance system. 

The Community Home Lenders Association (CHLA) is a national nonprofit association of small and midsized community based nonbank mortgage lenders. The mission of the CHLA is to advocate for Federal mortgage programs, rules and regulations which treat community mortgage lenders fairly, and which reflect the critical 

importance that these lenders play in providing access to mortgage credit for borrowers, in increasing competition in mortgage markets, and in giving borrowers the 

option of obtaining mortgage loans and services at the personalized, local level 

which community mortgage lenders provide. 

One of the strengths of our mortgage finance system has been the role that 

securitization has played in providing long-term fixed-rate mortgages for single- and 

multifamily housing. Securitization allows mortgage lenders located anywhere in 

the country to originate loans and sell them off, thus replenishing the originator’s 

reserves and capacity to originate new loans. This has created a vibrant market in 

which smaller banks, credit unions, and nonbank mortgage lenders can actively participate in mortgage markets, provided they are responsible and originate according 

to loan underwriting standards that the ultimate purchasers or guarantors establish. 

For many decades, this process worked well, creating a TBA market for 30-year 

fixed-rate loans and fueling a vibrant housing market which has increased home 

ownership rates and helped the housing sector play a vital role in the economy. Obviously, though, this process did not always work so well, such as during the 

subprime housing boom, with the result being the Federal Government putting 

Fannie Mae and Freddie Mac into receivership, advancing hundreds of billions of 

tax dollars to cover GSE loan losses, and providing TARP funds to major financial 

institutions that were over-exposed to mortgages. 

Now, Congress is at a crossroads, facing momentous decisions on how to deal with 

Fannie and Freddie, and how to restructure our Nation’s mortgage finance system, 

to achieve the twin goals of continuing to provide available, affordable long-term 

fixed-rate mortgage loans to meet our Nation’s housing needs, while at the same 

time responsibly protecting taxpayers. 

In this respect, the CHLA commends the Subcommittee for holding his hearing, 

and the Committee for beginning a debate on these critical issues. The CHLA also 

commends the work of a bipartisan group of Senators in introducing S.1217, a comprehensive bill to reform our mortgage finance system. The CHLA believes S.1217 

is an excellent start, with many good provisions. Still, much more work lies ahead 

in debating these issues, finding ways to strengthen the bill’s provisions, and ultimately implementing a workable solution. 

The CHLA is taking this opportunity to submit a written statement to focus on 

the critical importance of getting mortgage reform right in terms of creating a diverse mortgage market that continues to include community based lenders, and 

smaller banks and credit unions. This is essential to having a truly competitive 

mortgage market, in which consumers have real choices. We also need to get this 

right, because if we don’t, we may end up with a mortgage market dominated by 

a few large banks and financial institutions that are ‘‘too big to fail,’’ and, because 

of their central role in housing finance, effectively ‘‘too important to fail.’’ 

On the central debate about whether there should be a continued Federal guarantee of MBS, the CHLA takes the position that such a guarantee is warranted, and 

that S.1217 forms a good starting point for achieving that goal. A Federal guarantee 

would provide essential liquidity to ensure affordable fixed-rate long term mortgages 

for our Nation’s housing needs, while also ensuring countercyclical lending when the 

private sector exits the market due to adverse economic conditions. A Federal guarantee is also important to ensuring that mortgage credit is available in all regions 

and for all property types. The CHLA believes this can be done in a way that protects taxpayers, through risk sharing to create market discipline and private absorption of first losses, guarantee fees that reflect the true risk to the Government, and 

sound regulation. 

But regardless of the details of how mortgage reform is done, the CHLA would 

like to identify the key issues and principles that we believe must be debated and 

addressed, in order to ensure a broad, consumer-oriented mortgage market. 

64 

Making Sure There Is a Cash Window for Smaller Loan Originators 

The CHLA appreciates that a great deal of effort went into S.1217 to address concerns about smaller lenders having access to mortgage markets if the originator 

can’t securitize the loans themselves. This includes language about the importance 

of access to a ‘‘cash window,’’ and authorization of a both cooperative and the 

FHLB’s to serve this function. 

However, the CHLA believes it is critical, both in the drafting of the legislation 

and its implementation, that such access is actually achieved. The CHLA would like 

to make two important points. First, the FLHB provision may be very helpful to 

banks and credit unions, but does not help nonbank community mortgage lenders. 

In fact, the existence of the FHLB option, if it works, could put less pressure on 

making sure the cooperative works, which would mean that only nonbank community lenders are left out. Secondly, whether through revised language or through a 

very strong commitment in practice to make this work, the CHLA believes it is critical to ensure that the cooperative—or whatever mechanism is designed to provide 

a cash window—ACTUALLY works in practice. Because, if not, we could lose a very 

vital portion of our housing finance system. 

Fair and Equitable Pricing 

One of CHLA’s concerns comes from the experience with the GSEs, in which volume discounts and other features were at times used to create a pricing structure 

which unfairly discriminated against smaller loan originators. Consumers are best 

served—and fairness dictates—that regardless of how mortgage reform is done, all 

players in a position of power within the market should have a pricing structure 

that is fair and equitable, that provides for access to secondary markets on full and 

equal terms to all qualified loan originators, of all types and sizes. 

The CHLA notes that S.1217 requires that the new regulator shall carry out the 

bill in a manner that credit unions and community and mid sized banks shall have 

equal access to any common securitization platform and are not discriminated 

against through discounts for volume pricing or other mechanisms. This is a good 

start, but the CHLA has two recommendations to strengthen this. First, the CHLA 

believes it is important to modify the bill where it refers in places like this to smaller banks and credit unions to also refer to community based nonbank mortgage 

lenders, as these lenders play an important part in our mortgage markets and 

should have comparable treatment. Secondly, the CHLA believes that prohibitions 

against volume discounts or other mechanisms that discriminate against smaller 

lenders should apply not just to a Federal insurance guarantee on the MBS, but also 

to other key players in the process, including guarantors and issuers. 

In addition to concerns about price discrimination, it is also important that net 

worth and capital requirements not be utilized in a manner that unreasonably discourages qualified loan originators and servicers. It is fair and reasonable for loan 

originators to have sufficient capital to be a going concern, to meet buyback/indemnification responsibilities and for servicers to meet advance obligations. But net 

worth requirements should always be transparent and nondiscriminatory among 

lenders, and should be reasonably related to indemnification and advance exposure. 

Without such equitable treatment, smaller and midsize mortgage lenders would 

not be able to compete on equal terms, and the result could be a market dominated 

by only the biggest lenders. 

Avoid Conflicts Between Securitizers and Origination Affiliates 

Another major concern is the fact that many of the Nation’s largest securitizers 

also have extensive loan origination distribution networks. Regardless of how mortgage reform is done, it is likely that the largest banks and securities firms will control the process of securitizing mortgages. If these same securitizers channel this 

power into exclusively purchasing loans from their affiliated mortgage originators, 

in short order small community based lenders, banks, and credit unions could quickly be cut out of the mortgage origination business. 

These types of concerns could be exacerbated if, as is likely, risk sharing is required. Currently even moderately sized mortgage originators are able to securitize 

Fannie Mae and Freddie Mac loans, as there is a relatively simple Federal guarantee. However, if securitizations in a reformed world generally require risk sharing 

through the securitization structure itself—eg., through subordinated tranches— 

then many moderately sized lenders may no longer have the expertise and capability of doing these more complicated securities structures. They may then be cut 

out of the securitization market. 

There are many potential ways to address these concerns. One blunt instrument 

might be to limit market share of any one lender. Alternatively, there may be ways 

to do this by constraining the ability of securitizers to exclusively channel loans to 

65 

1The Mortgage Bankers Association (MBA) is the national association representing the real 

estate finance industry, an industry that employs more than 280,000 people in virtually every 

community in the country. Headquartered in Washington, DC, the association works to ensure 

the continued strength of the Nation’s residential and commercial real estate markets; to expand 

home ownership and extend access to affordable housing to all Americans. MBA promotes fair 

and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies, 

mortgage brokers, commercial banks, thrifts, REITs, Wall Street conduits, life insurance companies, and others in the mortgage lending field. For additional information, visit MBA’s Web site: 

www.mortgagebankers.org. 

lender affiliates, or to ensure, in practice, that there is a competitive guarantee option that is not tied to securitizers, such as private mortgage insurance. However, 

regardless of the solution, Congress should acknowledge the challenge, and take 

steps to anticipate and address concerns about these factors that could lead to a 

highly concentrated mortgage market. 

Risk Sharing Must Be Done Right 

As noted, there seems to be an increasing likelihood that, regardless of the way 

mortgage reform unfolds, risk sharing will play an important role. The CHLA applauds the Federal Housing Administration (FHFA) for its pilot program to investigate various risk sharing models. Before Congress and the Nation commit to any 

mortgage structure that heavily relies on risk sharing, there needs to be some degree of assurance that this can work, and work on a scale needed to meet our Nation’s mortgage needs. We should not gamble with housing, which plays such a critical component in our Nation’s economy. 

Moreover, risk sharing should be done right. First, any guarantee should be incontestable; a guarantee should be a guarantee, not an opportunity to negotiate with 

the lender to see whether they might first foot the bill for losses, even though the 

lender did everything right in underwriting the loan. Correspondingly, the lender 

should bear its traditional historical responsibilities—underwriting loans according 

to loan standards, taking buyback risk related to reps and warranties, and assuming servicing responsibility for advances. 

Finally, if risk sharing is to become an important component of lending, Congress 

and the regulators should strive to create a broad and competitive market for different guarantee sources, so that the market does not become concentrated as a result of a narrow range of options. 

Single Securitization Platform 

The CHLA applauds the both the provisions of S.1217, and the efforts of the 

FHFA to create a single securitization platform. The CHLA believes these are important steps to create the most competitive possible market for consumers, by creating opportunities for all lenders, including community based nonbank mortgage 

bankers, community banks, and credit unions. 

In closing, the CHLA is pleased to participate in this important debate about the 

future of America’s housing finance system, and to offer these views and recommendations. 

STATEMENT SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION 

Chairman Tester, Ranking Member Johanns, and Members of this Subcommittee, 

as Fannie Mae and Freddie Mac (the GSEs) approach their fifth full year in conservatorship, it is important that policy makers begin defining the future role of the 

Federal Government in the mortgage market. Two bills, including a bipartisan bill 

introduced by Senators Bob Corker and Mark Warner, have recently been introduced in Congress and signal a promising beginning to this important debate. 

The Mortgage Bankers Association (MBA) 1 appreciates the opportunity to support 

the important role played by community lenders in our Nation’s housing market. 

Congress needs to ensure that any end state it considers affords lenders of all sizes 

the securitization options to directly access the secondary market—this principle is 

critical to level the playing field and create a vibrant, competitive market for the 

engine of the American Dream. 

Background 

As Congress considers both transitional and end-state reforms, it should ensure 

that the federally supported secondary market provides equal access and execution 

options that work for smaller, community-based lenders. Community lenders are 

crucial to this marketplace, providing Americans across the country with safe, susVerDate Nov 24 2008 11:14 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00069 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\07-23 ZPM DISTILLER\72313.TXT JASON
66 

tainable, and affordable mortgage credit. Policy makers should proceed carefully to 

ensure that a future housing finance system promotes a robust and competitive 

mortgage market. 

According to HMDA data from 2011, more than 7,500 lenders originated mortgages in that year. Fannie Mae and Freddie Mac report that roughly 1,000 lenders 

are direct sellers to the GSEs, and Ginnie Mae currently has more than 250 issuers. 

The vast majority of these lenders are smaller independent mortgage bankers and 

community banks. 

Not every smaller lender has the financial capacity or expertise to directly manage the risks and complexities of the secondary market. Many prefer instead to sell 

whole loans to aggregators. Others are uncomfortable selling only to aggregators because they do not want to risk losing other key product relationships with their customers. For some, it is critical to have direct access to the secondary market during 

times when the aggregators reduce their demand. Lenders with the appropriate 

skills and capital should have the opportunity to make their own choices about how, 

when, where, and to whom to market loans they originate, based on their core competencies and other strategic objectives. 

Unfortunately, current GSE practices sometimes limit the choices of otherwise 

qualified lenders. Eliminating these practices would be a significant transition step 

toward a vibrant future mortgage market, and in fact need not await legislative action. 

Congress should, however, ensure that the future mortgage market is accessible 

to smaller, community-based lenders in a meaningful way. These lenders need a secondary market system that delivers: 

• Price certainty, including guarantee fees that reflect the risk of the underlying 

loan and the true counterparty risk of the originator 

• Execution for both servicing-retained and servicing-released loans 

• Single-loan and/or small pool executions with a low minimum pool size 

• Ease of delivery; and 

• Quick funding. 

The cash windows operated by the GSEs provide some, though not all, of these 

aspects today. Moreover, while Ginnie Mae provides a means of securitizing individual loans, the complexity of the process has kept many smaller originators from 

becoming direct issuers, resulting in fewer Ginnie issuers relative to GSE direct sellers. 

MBA Position 

MBA believes that an explicit Government backstop is absolutely necessary for a 

vibrant, competitive secondary mortgage market. Serious consideration should be 

given to expanding the membership criteria of the Federal Home Loan Bank system 

(FHLBs). For example, Congress could allow nondepository institutions to purchase 

a class of capital stock that would provide nondepository mortgage lenders the opportunity to participate in and contribute to the market liquidity provided by the 

FHLBs. 

Small mortgage lenders also require certain elements to be present in order to 

enjoy meaningful access to the secondary market. These elements will be elaborated 

upon below. 

Explicit Federal Guarantee 

A vibrant, competitive mortgage market that is accessible to all creditworthy borrowers will require an explicit Federal guarantee, albeit one that is well defined, 

limited, and called upon only after deep layers of private capital have been exhausted. An important corollary is that any reforms—whether transition steps or 

end-state reforms—should also ensure that the federally supported secondary market provides equal access and execution options that work for smaller, communitybased lenders. This is an important precondition for a vibrant, competitive mortgage 

market that works for borrowers, investors, and the American taxpayer. 

Expand FHLB Membership 

MBA believes serious consideration should be given to expanding FHLB membership to include nondepository mortgage lenders. These lenders are often smaller, 

community-based independent mortgage bankers focused on providing mainstream 

mortgage products to consumers. In exchange for membership in the FHLB system, 

these institutions could be required to hold a limited class of stock with appropriate 

restrictions. Expanding FHLB access to these institutions would enhance market liquidity and ensure a broader range of mortgage options for consumers. 

67 

Key Elements for Small Lenders 

Increase Price Certainty and Transparency—One concern with the current market 

structure’s ability to provide meaningful, equitable access for all lenders has been 

varied pricing offered to different loan sellers. Although the GSEs have claimed that 

these disparities have narrowed, there is little transparency on the terms of pricing 

and underwriting criteria offered throughout the market, despite the fact the enterprises have been operated by an agency of the Federal Government for almost 5 

years. 

The Federal Housing Finance Agency (FHFA) currently has the authority to 

eliminate these opaque pricing and underwriting terms, and should do so as soon 

as possible. In addition, any successor to the GSEs that operates with a Federal 

guarantee should have a transparent fee structure based on the risk inherent in the 

transaction. This approach would recognize that private capital providing credit risk 

protection in front of the Government guarantee may price differently across originators. Finally, the use of underwriting concessions should be eliminated (except 

perhaps for limited-time pilot programs), and access to special programs, products, 

and delivery options should be open to any lender meeting required minimum eligibility standards that do not include delivery volume. 

Enhance Execution Options for Smaller Lenders, Including Allowing for SingleLoan Execution—Because of the risks associated with the GSEs’ large retained portfolios, most proposals regarding the future of the federally backed secondary mortgage market do not envision the successors to the GSEs having a balance sheet to 

fund a cash window. Today, there are existing and potentially new means available 

to regulators and the GSEs for delivering a small number of loans into multilender 

pools. For example, the Ginnie II and Fannie Majors programs both allow singleloan execution. 

However, these programs are more complex than using the cash windows, and 

thus only a small number of lenders utilize them. While Congress debates the longterm future of the market, these processes can and should be simplified now in 

order to build a successful platform for sustainable, single-loan, multilender execution. For example, although multilender securities might not price as well in the 

capital markets as larger pools from a single lender, any discount could be reduced 

by pooling practices that increase the size of these multilender securities. In addition, it is important for some smaller lenders that they be able to securitize loans 

on a servicing-released basis. 

Currently, the GSEs have programs in place which facilitate bifurcation of originator and seller reps and warrants so that originators can deliver loans servicingreleased. However, participation in these programs is tightly restricted. Such programs are necessary going forward, and should be made more broadly available to 

smaller lenders as soon as possible. MBA believes these programs do not require 

direct facilitation from any other market participant and that smaller sellers should 

be able to negotiate reps and warrants directly with any approved servicer. 

Quicker Funding—It is also important for smaller originators to have an option 

for receiving quicker funding. Today, GSE cash windows provide daily funding. Congress should consider including in its ultimate reform plan more frequent settlement 

dates to permit quicker funding. Broker-dealers already provide a bid for off-settlement-date trades using interpolated pricing. The expectation is that this market 

could grow if more sellers utilize it, benefiting community lenders and reducing 

costs for borrowers. 

To be approved today, direct sellers to the GSEs or issuers in the Ginnie Mae program must meet financial and managerial standards. Smaller lenders who wish to 

be direct issuers will likely need to meet the standards set by the public guarantor 

in a future model. These standards need to be set at levels that allow for meaningful access by smaller lenders. 

Conclusion 

As policy makers begin transitioning the market toward the desired end state for 

the GSEs—either through regulatory, administrative, or legislative actions—there 

are two items that need particular attention. 

First, the cash window needs to remain in place until an operable single-loan execution process is up and running. As the GSE portfolios wind down, sufficient balance sheet space needs to be maintained to aggregate loans from smaller lenders 

who are not yet ready to securitize. 

Second, the FHFA securitization platform initiative needs to include plans for the 

acceptance of small lot deliveries into multilender pools, perhaps initially designed 

as an expansion of Fannie Mae’s Majors program. Every effort should be made to 

further simplify this program so that it can be a viable, competitive option for lenders of every size. 

68 

Making the secondary market work for smaller lenders is critical for providing a 

competitive market, which ultimately benefits homebuyers. Policy makers should 

take the steps available today to make sure that secondary market reform provides 

smaller lenders with opportunities for direct access. 

MBA is eager to work with the Chairman, Ranking Member Johanns, and all 

other Members of this Chamber and the Congress as a whole to ensure that the 

mortgage market in American remains vibrant, competitive, and accessible. 

69 

LETTER SUBMITTED BY CHAIRMAN TESTER FROM B. DAN BERGER, 

EXECUTIVE VICE PRESIDENT, GOVERNMENT AFFAIRS, NAFCU 


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LETTER SUBMITTED BY CHAIRMAN TESTER FROM DOUGLAS M. 

BIBBY, PRESIDENT, NATIONAL MULTI HOUSING COUNCIL; AND 

DOUGLAS S. CULKIN, CAE, PRESIDENT, NATIONAL APARTMENT ASSOCIATION 


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