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Small Banks Prepare for Housing Reform

NEW YORK ( TheStreet) -- Community banks are preparing to step into the mortgage market just as politicians debate how to scale back housing finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC).

But how and when smaller banks expand their mortgage presence depends what the U.S. government decides to do with the two government sponsored enterprises (GSEs).

New York Community Bancorp (NYB) CEO Joseph Ficalora said his bank will take advantage of the opportunity as the housing market opens up to private competitors by "originating more loans, including jumbo loans for insurance companies, credit unions and banks." New York Community originated $10.8 billion in loans with revenue of $183.9 million last year, he said.

Ficalora is one of numerous CEOs that discussed the opportunity in the mortgage industry during the American Bankers Association Community Bank Investor Conference last week.

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Regulators are currently evaluating ways to eliminate the GSEs role in the mortgage market, a difficult task given the fact that Fannie and Freddie guarantee over half of all U.S. mortgages.

So far the Obama administration has put three options on the table to overhaul Fannie and Freddie.

The first option would have the government back private mortgages, and the second would limit assistance to borrowers through agencies like the Federal Housing Administration.

The third option would essentially make the government a reinsurer of mortgage investments that are made by private insurers.

In all three scenarios community banks could benefit, said First California Financial Corp. (FCAL) CEO C.G. Kim at the ABA conference.

"There are two major growth areas: the mortgage bank and wealth management areas," Kim said, adding that First California purchased more than $50 million in home mortgage loans in the third and fourth quarters of 2010. "We will be looking for acquisition opportunities in the $500,000 range in these areas."

Robert Davis, executive vice president of the ABA, said that the government's plan to create another entity to take the place of Fannie and Freddie was like, "creating a new horse to pull the same cart." He argues that the best way to help return the mortgage industry to profitability and make it attractive to the private-sector is to raise "guaranty fees."

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