Pennsylvania's economy is still rebounding from the collapse of the housing market in 2008. Though there is little doubt the effects of the housing crisis will continue to be felt for some time, there are indications that the housing market is making a comeback.
One such indication is the immense profitability of the government sponsored enterprises Fannie Mae and Freddie Mac, which hold a majority of the nation's mortgages. In 2008, Fannie and Freddie were in dire financial straits because of the condition of the housing market, bad loans that were sold to them by the big banks, and a host of other causes. The federal government subsequently infused $187.5 billion into these GSEs to keep them afloat. Fannie and Freddie were placed in conservatorship and have now paid the Treasury more than $200 billion in dividends, repaying taxpayers with interest.
In an effort to prevent a similar housing crisis from happening in the future, our leaders in Washington, D.C., have proposed to reform Fannie and Freddie. In fact, the reform legislation making its way around Capitol Hill goes beyond merely making improvements to the two companies. Separate proposals put forth by Sens. Mike Crapo (R-Idaho), Tim Johnson (D-South Dakota), Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) propose to eliminate Fannie and Freddie and replace them with a new, large federal entity called the Federal Mortgage Insurance Corp.
There is broad agreement that our nation's housing system needs to be reformed. To their credit, aspects of both proposals take into consideration the important role community banks play in America's housing finance system. However, there are aspects of each proposal that continue to be cause for concern. Pennsylvania's community bankers went to Capitol Hill to discuss banking reform and the Johnson-Crapo legislation with lawmakers this week because the Senate will be marking up the legislation very soon.
Community banks play a vital role in the economic and overall betterment of the communities they serve. They provide service tailored to the needs of local business owners in ways the big banks cannot. Pennsylvania's community banks typically have 30 percent of their holdings in commercial loans with local businesses and more than half of their holdings in local home mortgages.
On average, 95 percent of a community bank's loan portfolio is reinvested into its community, often within 50 miles of a bank office. To put it simply, our banks do well when our communities do well.
One of the most concerning elements of the proposed Johnson-Crapo legislation is that control of the mortgage market could fall into the hands of the big banks. The legislation allows for loan originators to also guarantee, aggregate and securitize loans. If this provision goes unchanged and were enacted into law, large lenders with the ability to perform all of these functions would have the ability, and financial incentive, to price community banks out of the mortgage market altogether.
Eliminating the separation between loan originator and guarantor would end the due diligence that is applied when there are multiple players with vested interest in a loan. What's more, the FMIC will come along with new regulations and new standards, creating uncertainty among smaller lenders providing critical mortgage, business and personal financing.
Another concerning aspect of the proposed legislation is the fact that Fannie and Freddie would be wound down without repaying those community banks that were encouraged by their own regulators to purchase preferred shares in the companies. Community banks need all available capital to continue operating and making loans and should be made whole under reform rather than having their investments in the GSEs wiped out.
Pennsylvania's community banks appreciate Sen. Pat Toomey's cautious approach to the Johnson-Crapo legislation. We welcome his continued efforts to get reform done right. Washington needs to approach the reform of one-fifth of our nation's economy with caution and be sure it supports the nation's smaller lenders in the process.
Nick DiFrancesco is the president and CEO of the Pennsylvania Community Bankers Association.