What is the American Dream? For many, the fulfillment of the American Dream is homeownership.
To that end, a healthy and accessible primary mortgage market is vital to the success of that dream. And an efficient secondary mortgage market is vital to the success of the primary mortgage market.
The secondary mortgage market is the market used for the common practice of a lender “selling” loans. Residential mortgages are assembled into pools and sold to investors. These purchasers often are Fannie Mae, Freddie Mac and private organizations.
This secondary mortgage market is important because it creates a national market for resale of residential mortgages. This ensures that mortgage originators, regardless of their location, have access to capital, which in turn ensures that home buyers have access to financing.
These sales in the secondary market ease the burden and risk that mortgage lending places on lenders and frees up liquidity for lenders to help spur local mortgages.
The presence of the secondary mortgage market also has helped develop the mortgage industry by standardizing documentation, diversifying types of mortgages and bridging a national market.
Fix, don’t end, system
Yet, the system is not perfect. In the wake of the financial crisis, the problems that led to the federal bailout of Fannie Mae and Freddie Mac are being scrutinized.
As Congress and the Obama administration undertake this effort, it is important that they make adjustments and adaptations. Yet, they need to resist the temptation to throw out the whole system and start over.
The secondary mortgage market needs to exist, and with it the widespread availability of mortgage credit and consumer protection.
Credit unions are increasingly important lenders in the residential mortgage market. Credit unions are seeing a significant increase in mortgage originations, an increase brought on by credit unions’ strength and resiliency during the recent financial crisis when other lenders had to restrict lending.
The decision by a credit union on whether to hold or sell a mortgage is primarily one of management of assets and liabilities, such as the balance between maturities of loans and deposits. Access to a smoothly functioning and accessible secondary market is vital to a credit union’s ability to meet borrowers’ needs.
The federal government plays a very important role in ensuring that the secondary market operates efficiently, effectively and fairly for borrowers and lenders alike.
As Congress and the Obama administration consider comprehensive changes to the housing finance system, it is imperative that the secondary market continues to support credit union lending so that credit unions can continue to be a source of reasonable mortgages for consumers.
Quite frankly, many credit unions have concerns about a world in which the secondary mortgage market is occupied by a handful of large banks, specifically concerns about access and pricing.
Will the large banks want to deal with other financial institutions such as credit unions? Will the large banks favor their own mortgage divisions? Will pricing be competitive? Will banks value and respect the needs of the borrower?
Support for credit unions
The integrity of the consumer relationship is very important to credit unions. In a secondary market dominated by big banks, some credit unions might be reluctant to sell a loan to a large bank if it means losing the opportunity to service the loan.
Mortgage loan servicing is an important component of home mortgage loan process for both lenders and borrowers.
The lack of uniform standards and procedures in a market operated by the largest banks is also a concern.
Each bank is likely to have different underwriting standards, documentation requirements and procedures. This will severely limit the ability of small financial institutions to work effectively within the secondary market.
Reform of the housing finance system has already proven to be a very difficult challenge, but failing to make necessary changes to improve the system will result in even greater challenges for the economy, borrowers and lenders.
Mortgage lending is a vital financial service credit unions fulfill for consumers and for the economy. A healthy, efficient and accessible primary and secondary mortgage market is critical to credit unions and the millions of consumers we serve.
Rod Staatz is the president and CEO of SECU and a member of CUNA’s Board of Directors. He can be reached at Rod.Staatz@secumd.com. SECU is a state-chartered, federally insured credit union headquartered in Linthicum. It serves 242,800 members and had $2.21 billion in total assets as of April 2011. CUNA (Credit Union National Association) is the nation’s largest credit union advocacy organization, representing approximately 90 percent of the 7,500 state and federal credit unions in the United States and their 93 million members.