Inside Financial Services

Small Banks’ Nutty Lobbying Goal

Keep the federal government involved in mortgage lending? Bad idea.

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The Wall Street Journal reports that

Small lenders are fighting efforts to scale back U.S. government support for the mortgage market, arguing that proposals to do so will allow the industry’s biggest players to increase their already dominant market share. . . .

Currently, nine in 10 U.S. mortgages are guaranteed by either federal agencies or government-controlled mortgage giants Fannie Mae and Freddie Mac, which buy up mortgages, package them into loans and sell them as securities. The two companies have needed about $134 billion in taxpayer aid since they nearly failed two and a half years ago. Both Democrats and Republicans have called for their elimination.

Small lenders, however, warn that getting rid of Fannie and Freddie will increase the power of the four largest U.S. mortgage lenders-Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. Those big banks have steadily increased their share of the home-loan market in the wake of the financial crisis, when they absorbed lenders Wachovia Corp., Countrywide Financial and Washington Mutual.

Oh, please. To have a better shot competing against the big banks in home lending, small banks want to keep around the twin cancers of American mortgage finance, Fannie Mae and Freddie Mac? That’s so wrongheaded that it’s almost shameful.

First off, mortgage lending aside, small banks have plenty of advantages over the big banks in other areas of banking. Gathering deposits, for instance. If you doubt it, ask Bank of America how its market share is holding up in places like Chicago. Meanwhile, a key reason the housing market blew up as spectacularly as it did is that the federal government had gotten way too involved in the mortgage lending business. Via Fannie and Freddie, it pushed homeownership policies that, we now know, were insanely risky. The most important thing Congress can do to prevent a rerun of what happened in 2008 and 2009 is to reduce the federal government’s role in mortgage lending to a last-resort minimum. Everyone else but the small-bank lobby seems to understand this. I’m shocked the small-bank lobby doesn’t.

Like it or not, mortgage lending, like other types of consumer lending, is a scale business. The Journal points out that even with the presence of Fannie and Freddie helping to level the playing field for the small banks, the four big mortgage lenders (Wells, BofA, Chase, and Citi) accounted for 60% of originations last year, up from 36% in 2007. So small banks will always have a tough time. Their lobbying for continued help from the feds isn’t just pointless-it’s dangerous, too.

7 Responses to “Small Banks’ Nutty Lobbying Goal”

  1. Stays72

    Based on your logic, we should actually abolish Wells, BofA, Chase and Citi, since they were the ones feeding Fannie and Freddie the majority of the “insanely risky” loans mentioned. Was it Fannie and Freddie that fed themselves these loans? Or, was it the big banks that fed Fannie and Freddie all those insanely risky loans? Why did the big banks originate insanely risky loans when they knew all along that they were insanely risky loans? Aren’t they smart enough to know that these loans were insanely risky? Just because Freddie and Fannie offered to buy them doesn’t relieve the originators of responsibility for producing them. Therefore, we should abolish Wells, BofA, Chase and Citi, since they are unable to control their underwriting impulses.

  2. Doug

    The problem with your arguement is if both agencies are eliminated to quickly the value in housing will face a large devaluation. The agencies need to be in place until all the foreclosed properties have worked out fo the inventory and the market returns to stability. Then and only then can the total implications of eliminating Fannie and Freddie be evaluated. It has nothing to do with leveling the playing field at this point.

  3. Adam Rust

    So your logic is that small banks should cease to protest because winding down Freddie and Fannie is better for the public as a whole? Setting aside whether or not the GSEs help or hinder the housing market, the objection on the part of the small banks is certainly understandable. The big banks might be able to hold at least some of the mortgages that they originate, whereas the small banks don’t have the capital to do that. We don’t know if private investors are going to have an appetite for 30-year mortgages that lack a means to guard against interest rate risk and consumer defaults. Actually, I would say that we can predict that they won’t have much appetite for that. Why would you loan money for 30 years at 5 percent when you can get higher rates from AAA and AA corporate debt for seven years, or 3-4 percent from Treasuries of shorter maturity as well?

    Losing the GSEs probably means the end of the 30 year mortgage. It will lower housing values. In the process, it will kill the private mortgage insurance companies, too. (see QRM)

    http://banktalk.org/2011/03/24/why-banks-hate-the-qualified-residential-mortgage/

    The small banks are making an argument to protect their own business interests, but they are also pursuing an agenda that helps borrowers and home owners.

  4. Shanon

    Well said Tom, down w/ government subsized mortgage rates. Let private market take the risk and price it accordingly (higher). What potential BOOM for the banking industry and loan growth as GSE’s and agencies dramatically reduce their dominant market share and market pricing evolves.

  5. clttys

    Tom you are correct. The players that ruined the housing market are all large – fan, fred, bear, lehman, WM, CFC, current megabanks. When the market share was fragmented, the risk was spread around.

  6. Richard

    I am no fan of continuing Fannie and Freddie as they are – pseudo free market but with government backing (although it seems all TBTF financial entities have that distinction). Push for homeownership for “everyone” was poor policy and Fannie and Freddie contributed to that along with politicians ranging from Barney Frank to George W Bush.

    However continuing to point to them as primary cause of meltdown is ridiculous. Recent Senate report comes closest to identifying all of the drivers, and the primary culprit was the lack of constraints on greed embodied most clearly in Goldman’s activities. It will be interesting to see if Justice and SEC take action as investigations continue. http://news.yahoo.com/s/nm/20110504/bs_nm/us_goldman_senatereport;_ylt=AnndgPq4hAUwrfP4lGjvhEe573QA;_ylu=X3oDMTJ0ajlpMDFrBGFzc2V0A25tLzIwMTEwNTA0L3VzX2dvbGRtYW5fc2VuYXRlcmVwb3J0BHBvcwM0BHNlYwN5bl9wYWdpbmF0ZV9zdW1tYXJ5X2xpc3QEc2xrA2p1c3RpY2VkZXBhcg–

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