Throwing the Baby Out With the Bathwater: Competition Decreases as Mega banks Get Stronger

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Community banks and credit unions brace for end of Fannie, Freddie

By , Published: February 12

As the Obama administration forges ahead this spring with plans to wind down mortgage giants Fannie Mae and Freddie Mac, community banks and credit unions are bracing for the impact.

The government-sponsored entities are the most active buyers on the secondary market for residential mortgages, where a growing number of small financial institutions sell the home loans they originate. Private investors remain largely inactive in acquiring mortgages, leaving originators to question how the industry will function without government support.

“We’re all preparing to work with whatever private investor structure re-emerges,” said Juli Anne Callis, chief executive of Rockville-based NIH Federal Credit Union, which serves the biomedical industry. “Are those investors starting to percolate up? We’re hearing discussions, but we’re not seeing it yet.”

A year ago, the administration issued a white paper outlining three options for replacing Fannie and Freddie. They include creating a new government agency that would continue to insure mortgages or one that would intervene only during a crisis.

Small financial institutions worried that with Fannie and Freddie out of the picture, a handful of large banks could dominate the secondary market. Those big banks might favor their own mortgage originating divisions and muscle community banks and credit unions out of the market.

“We want some sort of mechanism or entities that would provide equal access to community banks,” said Ann Grochala, vice president of lending and accounting policy at the Independent Community Bankers of America, a trade group. “There’s a variety of possibilities out there . . . but we haven’t seen the solution yet.”

Holding on to their loans

Traditionally, community banks and credit unions kept on their books a majority of the loans they originated. Credit Union National Association, for instance, estimates that its members sold between 25 and 40 percent of their loans before the financial crisis. Those percentages grew as falling interest rates fueled demand for mortgages.

“Credit unions individually are fairly small in this business,” said Bill Hampel, chief economist for the credit union group. “But if there’s no publicly supported vehicle to the secondary markets, each credit union would be so small that they would not get good pricing or access. And that would cost credit union members.”

Hampel said the association is talking with the Treasury Department about the future of McLean-based Freddie Mac and Washington-based Fannie Mae, but he noted that credit unions are working on contingency plans. One solution, he said, could be greater reliance on credit union service organizations. Such entities enable institutions of all asset sizes to make loans by collectively managing the risks.

Grochala said the community bank association is also considering a cooperative structure, modeled after the Federal Home Loan Banks, whereby participating banks would be responsible for capitalizing the entity.

Still, she said, “there must be some sort of continued government ties because that provides the liquidity source you truly need and confidence to the markets,” Grochala said. “There are a variety of ways that could function, whether it be an explicit or implicit fee paid for the guarantee.”

While Cardinal Bank chief executive Bernard Clineburg doesn’t discount the viability of a cooperative model, he stressed there are private investors, such as pension funds, buying mortgages from community banks like his.

Tougher on borrowers

McLean-based Cardinal, he said, holds on to less than 10 percent of the $3 billion to $5 billion in mortgages it originates annually. Clineburg said the bank doesn’t sell directly to Fannie and Freddie but instead moves loans to aggregators that are likely to work with the mortgage giants. Cardinal, he said, should suffer little impact if the agencies are phased out in the next two years. But there would be consequences, especially for consumers.

“When you have private industry purchasing the mortgages, they are going to be tougher on underwriting. And that means larger down payments, higher interest rates to adjust for the risk of no government guarantee,” Clineburg said.

The administration has been taking steps to increase private- sector participation, including scaling back loan limits and raising the guarantee fee, said Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington.

“They’re trying, but they are going to have to make it safer for the investment and more profitable for the private market to come back,” he said.

16 Responses

  1. @ ET & CARRIE

    I believe the greeks could offer the resolution under the world cout rules—it does not have to be US

  2. @RD
    “how free enterprise works best……..without government involvement or intervention.”

    ” free enterprise” should not be used to justify criminal conduct–or monoploy action

  3. @Katheryn,

    They have us right where they want us: confused, pissed, enraged and on the brinks of committing some despicable action that would guarantee that we are put away for good and they can throw away the key without any peep from anyone.

    The idea is to get us so riled up that we do become dangerous. Then, they’ll turn around and say: “See, we told you so! Those greedy homeowners who didn’t want to pay were ready to anything for a free house!!!”

    And you know what? We are not going to give them that satisfaction! That would be handing them the victory.

  4. @ Enraged

    Your point is exactly what I have not been able to correctly articulate. My note has been sold/assigned/transferred back and forth between boa and bac where they both have the note by all the notices; at the same time. I start going through my files and all the payment notices as well as letters from the numerous lawyers all claiming its been assigned on such and such a date; but then I find a payment notice on that date that shows they already have it. It’s like walking around in a maze not finding the right passage out. And to top that I have three different mortgages which I was working on today. Then I get hit with three different motions from the jack asses that I will have to work on tomorrow. And to add the whipcream and cherry, I logged into Pacer to look through things and I find that all of my motions have been removed so they can’t be viewed. No one informed me of this and I will be one the phone tomorrow with the court. WTF is going on. I swear the country is cutting off our freedoms one by one. This is so very very wrong. The banks own the country and they are making sure everyone knows it. This is just to surreal.

    @JG

    I was going to get some info to you, however, I will be working on what I have been hit with and hopefully will try to post it over the weekend. I am so pissed right now that if I had a weapon and could get to a bankster, I just might use it.

  5. Anyone up to reading some tripe from Holder and Donovan about what a “great deal” the sham settlement is for homeowners?

    http://www.huffingtonpost.com/shaun-donovan/holding-banks-accountable_b_1279073.html?ref=business&ir=Business#comments

  6. Holding the Kings and Queens to account would be a whole lot simpler if the vast majority of the citizenry weren’t doing their best simulation of blinking yellow eyes in the darkness just beyond the campfire….silent and apparently unaffected….speechless and curiously dumb.

    Things are going to have to get absolutely unbearable, or maybe one out of every two will have to face eviction before the rest of America decides enough is enough, if in fact they ever nad up enough to get to that point. Otherwise, it appears that the multitudes losing their homes are destined to still be listed under the deadbeat column, and that old line about Fannie and Freddie and Dodd and Franks being to blame is still the catch phrase that explains it all.

    Evidentially it’s going to have to get universally unpleasant. Oh for joy. Can’t wait.

  7. @DCB

    Correct. When I first started posting here I made the statement that these were human rights issues and crimes against humanity…a couple people put me down and said I didn’t understand what human rights issues were—wonder what they think now…

  8. The headline…………………..”Throwing out the baby with the bathwater”

    The quote indicates a major misunderstanding of how free enterprise works best……..without government involvement or intervention.

    We have all seen the undeniable results of the “GSE Business Model”……………………..what is so difficult to understand??? It is fatally flawed and simply does not work for a million reasons.

  9. referencing a couple pieces of the article cited by CARIE,
    “…To take one example, Vaggelis Petrakis, who was burdened with debt, killed himself because of his “shame,” “pride,” and “dignity,” his son told the WSJ.

    In a separate incident, a 55-year-old man set himself on fire outside a Greek bank after failing to renegotiate the debts he could not pay, according to Reuters.”

    A threat of suicide is meaningless—–an attempt of suicide is not much more convicing, but when people in fact set themselves on fire–its hard to ignore.

    The question one has to ask: “Why would you set youself on fire BEFORE you take drastic action to punish those who put you in that bad state?

    Maybe the answer is that the mess is so convoluted that average suffering people cannot determine who in fact put them in that state. Unfortunately, most people tend to blame their troubles on elected politicians who themselves do not necessarily understand the core issues–the whies and wherefores;

    And its not police or soldiers or judges that are to blame—they are simply victims that may or may not realize they are victims. They are the equivalent of pawns placed in the front row to shield the King and Queen.

    The trick is to identify the Kings and Queens. And hold them to account. There are many around the world today and FORBES does a great job defining them. These billionaires are the equivalent of the legions of French nobility that walked up the scaffold to meet the invention of Dr. Guillotine. The world court must eventuall list these names as persons who may have inflicted the globe with “crimes against humanity.”

    It is difficult to accept the idea that a multi-billionaire did not achieve that wealth without violating international law–the presumption should be that they did. The court might allow rebuttal, but they should be held in a modern-day Bastille while that rebuttal is made.That was how Madoff was treated. Why does a different rule apply to the likes of Jon Corzine.??? Or others in the financial sector that obviously are neither Bill Gates/ Zuckerman or Henry Fords? These financial pillagers made nothing–brought no value-added ideas to the world—did nothing positive for mankind–they simply took/ and illegally manufactured opportunities to separate honest workers from their possessions, from their jobs, from their retirements, from their health safety and general welfare–destoying families and individual lives by the tens of millions. This in the agregate is a crime against all humanity. There is no simpler way to decscibe it. There is no reason to describe it in more complex terms.

  10. @dny,

    You know what? Those loans are alleged to be… all of the above! Exactly like what happens to debts “purchased” by JDB. Have you noticed that, when you look at the (very few) existing recordations, loans were going from one bank to the other by way of a “Transfer/assignment/purchase” agreement?

    When I saw that in my own file, I started wondering “What the f… does that mean? Was it transfered, assigned or purchased? What’s the difference? What is the definition of transfer? What does Webster say about “assignment”? When is something alleged to have been purchased? What does the LAW say about each? Does the law differentiate between transfer and assignment? Is there any legal justification to putting all three words together? Doesn’t that, in fact, void the agreement since it calls for completely different and contradictory laws? Etc., etc.”

    They tried so much to cover all the basis that every single aspect of mortgage loans was irreparably blurred. Can’t be fixed. Need to rewrite everything from scratch, the one thing Obama does not want under any circumstances, even though, if done properly and at banks’ expenses, it would be the best way to resolve unemployment in this country.

  11. From the article above:

    “Clineburg said the bank doesn’t sell directly to Fannie and Freddie but instead MOVES loans to aggregators that are likely to WORK WITH the mortgage giants.”

    “moves”? “work with?” Even today, they are still not admitting what is happening to “the loans,” i.e., whether they are sold, assigned, transferred, pledged, securitized, etc. It’s still a shell game.

  12. NOT “MORTGAGES”—
    RECORDER’S OFFICES ARE CRIMES SCENES—
    FORECLOSURES FULL SPEED AHEAD ON PRESUMPTION—NOT FACTS—

    The MBS was and is a giant SCAM…we were SCAMMED…and we have no recourse…we have to give our SHELTER to a strawman…we were told our shelter was legitimately obtained…how is the scammed victim AT FAULT? We should have known it was a SCAM??? We should have known, and therefore we must be punished for NOT KNOWING WE WERE BEING SCAMMED.

    On another note—Mr.Dimon is scared of OWS:

    http://www.huffingtonpost.com/2012/02/14/jamie-dimon-occupy-wall-street_n_1276911.html?ref=business

  13. Folks Dodd/Frank had provisions that choked off small business and land and housing loans to small developers. I know because that is my business. I had perfect credit and called several small banks to no avail. Kinda makes economy and recovery difficult. This was a direct result of Dodd/Frank legislation.

    D/F threw a few bones to “protect the consumer” then applied all big bank regulations all the way down to the local banks choking off loans.

  14. The value of those entities was to support continuation of conventional long term fixed rate loans. This filled in for the hole left when the financiers destoyed the S&L industry in the 1990’s.

    Without fixed rates–in the background of massive global currency devaluations we face probable sky-rocketing inerest rates in 2-3 years–already seen for fule, food etc.

    The result will be like Ireland. ALL LOANS ARE ARMs. All houses will be one step away from seizure. All houses will suffer tremendous drops in value—more real rentals–most supposed home loans will in effect become net net rentals.

    No American dream. No concept of “every man’s home is his castle” —

    its time for the sequal to “ITS A WONDEFUL LIFE”—“GEORGE BAILEY FINALLY BURIED BY POTTER’s BANK”

    Here is the POTTER-like bank’s sense of responsibility to its MBS investors—-how would you like for this outfit to be your landlord??

    “IN NO EVENT WILL WE BE LIABLE FOR ANY DAMAGES, LOSSES OR EXPENSES, INCLUDING WITHOUT LIMITATION, DIRECT OR INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, ARISING IN CONNECTION WITH THIS WEBSITE, THE USE HEREOF OR RELIANCE ON ANY INFORMATION CONTAINED HEREIN, EVEN IF WE KNEW OF THE POSSIBILITY OF SUCH DAMAGES, LOSSES OR EXPENSES”

  15. Larger down payments + Hihigher Interest Rates = LOWER HOUSING PRICES

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