Bill Cosgrove, CEO of Union Home Mortgage Corp. and chairman-elect of the Mortgage Bankers Association (MBA), testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs at a hearing titled, “Housing Finance Reform: Protecting Small Lenders Access to the Secondary Market."
Below is a copy of Cosgrove's oral testimony, as prepared for delivery.
"Chairman Johnson, Ranking Member Crapo and members of the committee, my name is Bill Cosgrove and I am a Certified Mortgage Banker. I have 28 years of experience as a mortgage banking professional. I currently serve as chief executive officer of Union Home Mortgage Corp, headquartered outside of Cleveland.
"I am also the chairman-elect of the Mortgage Bankers Association. My company was founded in 1970 and I purchased it in 1999. Our family-owned business employs 278 individuals, and we are very proud that since 1999, we have helped more than 50,000 homebuyers finance and refinance their homes and achieve their dreams of homeownership.
"Small and midsize lenders play a crucial role in the American housing finance system. 7,400 lenders originated mortgages in 2012. Fannie Mae and Freddie Mac each 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. In fact, according to the most recent HMDA data, independent mortgage bankers represent 11 percent of all lenders nationwide, yet they originated 40 percent of all purchase money mortgages in 2012.
"Over the course of the next year, small lenders will become increasingly important as we transition from a predominately refinance market to a purchase market.
"It is important to recognize that not all small lenders have the same needs when it comes to accessing the capital markets for mortgages.
"Lenders with the skills and the capital should be in a position to make their own choices about how, when, where, and to whom to sell their production, based on their core competencies and other strategic objectives.
"As policymakers consider both transitional and end-state reforms, the future secondary market needs to provide direct access, on competitive terms, for those lenders who can take on the requisite responsibilities.
"In particular, smaller lenders need a secondary market system that delivers:
►Price certainty that represents the risk of the underlying loan;
►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.
"Single-family lenders should be able to utilize familiar credit enhancement options, such as mortgage insurance, to facilitate secondary market transactions in a timely and orderly way. Key functions present in today’s secondary market system should be preserved, while allowing new forms of private credit enhancement to develop over time.
"Congress should give serious consideration to expanding Federal Home Loan Bank membership eligibility to include access for non-depository mortgage lenders. These lenders are often smaller, community-based mortgage bankers or servicers focused on providing mainstream mortgage products and services to consumers.
"S. 1217 proposes a system that is closer in many respects to the Ginnie Mae model. Lenders are issuers, and are responsible for obtaining private credit enhancement before delivering pools of loans to the central securitization platform for the government guaranty. This approach may work for some lenders, but may be too operationally difficult for many smaller lenders.
"S. 1217 provides an alternative for smaller lenders in the form of a mutual securitization company, a cooperative that takes the role of aggregator and issuer. S. 1217 also provides for the FHLB system to be aggregators for smaller lenders. Regardless, broad standards for a mutual should ensure a fair governance process that does not advantage one class of mutual shareholders over another. It’s equally important to ensure that end state reforms address the variety of ways that small lenders access the secondary market, and that any mutual company created is not the only option for small lenders.
"Additionally, as Congress considers broader reforms to the secondary market, care must be taken to ensure a smooth transition, and that 'switching costs' to a new system does not create a major barrier to participation by smaller lenders.
"Key GSE assets, including technology, systems, data, and people, should be preserved and redeployed as part of any transition associated with GSE reform. For example, certain assets could be moved into the Common Securitization Platform.
"Other assets, such as automated underwriting systems, could be made broadly available through a public leasing program, or auctioned with conditions that ensure that access to all market participants.
"Making the secondary market work for smaller lenders is critical for providing a competitive market, which ultimately benefits homebuyers. We urge you to ensure that secondary market reform provides smaller lenders with opportunities for direct access.
"Thank you again for the chance to continue this critical dialogue with the members of this committee. I look forward to your questions."