By Laura Alix
A recent proposal from the Federal Housing Finance Agency (FHFA) that would limit membership in the federal home loan banking system has bankers worried that it could squeeze liquidity out of the home mortgage market, furthering the market’s sluggish rebound.
The FHFA recently extended the comment period on the recent notice of proposed rulemaking after pushback from the Federal Home Loan Banks. Until now, the FHFA has generally narrowed the scope of its focus on government-sponsored entities to Fannie Mae and Freddie Mac. Now it’s taking a closer look at the federal home loan bank system.
In effect, the proposed rule would subject all members of the system to an ongoing requirement that member institutions hold at least 1 percent of their total assets in residential mortgage loans, and that some larger institutions hold at least 10 percent of their total assets in residential mortgage loans. Currently, banks and other financial institutions are held to those rules only at the time they apply to membership.
According to the FHFA’s proposal, “The absence of an ongoing requirement means that a member may reduce, or even eliminate, its residential mortgage loan holdings without affecting its eligibility to continue as a bank member.”
This doesn’t sit well with some community bankers, nor with the federal home loan banks themselves, who worry that an ongoing requirement could, over time, disqualify many smaller financial institutions from membership, as they sell off low-interest rate mortgage loans over a cycle of normal ups and downs in the marketplace.
But the FHFA counters that the ongoing 10 percent test would not apply to any federally-insured community financial institution with assets less than $1.1 billion – a line that may sound awfully familiar to many community bankers.
“If there are issues they want to address with particular institutions, they have a lot of regulatory authority to do that on a case-by-case basis, so rewriting the membership rules, I think at this point, may be a little bit excessive,” said Jon Skarin, senior vice president, federal regulatory and legislative policy, at the Massachusetts Bankers Association.
The proposal would also exclude captive insurance companies – including those used by mortgage REITs to gain access to FHLB advances – from membership, but would allow current members to remain so for five years with some restrictions on the ability to obtain advances.
‘A Solution In Search Of A Problem’
The proposal has some scratching their heads as to exactly what the FHFA is attempting to prevent or mitigate.
“That is probably one of our single biggest problems with the proposal. It appears to be a solution in search of a problem,” said David Jeffers, executive vice president of the Council of Federal Home Loan Banks.
A detailed proposal from the FHFA sheds little light on that question, other than to suggest that the agency may be concerned that present regulations aren’t clear enough about what, exactly, constitutes a demonstrated support of residential mortgage lending, and cites the agency’s authority under the Bank Act to tweak those membership requirements as needed.
The potential ramifications of the proposed rule are myriad, and seem to depend on who you ask.
“The core value of their membership is not only that liquidity, but the reliability of the availability of that liquidity. Many members only use that access from time to time, but the reliability is important to them. The primary harm this does is threaten that access to credit for the members of the home loan banks and, of course, their customers, the communities they serve,” Jeffers said.
While Jeffers estimated that nationwide, more than 100 community financial institutions could be disqualified from membership in the federal home loan banks, the FHFA estimates that only 47 banks or thrifts would be affected by the proposed ongoing test. Neither the FHFA nor the Council of Federal Home Loan Banks could say specifically whether any of those potentially affected institutions would be in Massachusetts, however.
Still, others have suggested the new rules might be little more than an administrative pain, on the part of both the federal home loan banks and the banking institutions they would now be required to monitor.
The proposed rule may ultimately be more meaningful to captive insurers that would now be denied membership wholesale; but more broadly, some see this as an overreach on the part of regulators – their job is to enforce the rules, not make them.
“During the financial crisis, [the federal home loan banks] had a really good story to tell,” Skarin said. “They were really active, they helped to provide a lot of liquidity when other sources of liquidity dried up. Do you want to deny a bank access to that?”
The comment period on this proposed rule will close on Jan. 12 of next year.
Laura Alix is a staff writer for The Warren Group.